November 6, 2017
Bank of Japan
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Nagoya
Haruhiko Kuroda
Governor of the Bank of Japan
Introduction
It is my great pleasure to have the opportunity today to exchange views with a distinguished
gathering of business leaders in the Chubu region. I would like to take this opportunity to
express my sincerest gratitude for your cooperation with the various activities of the Bank
of Japan's Nagoya Branch.
At the Monetary Policy Meeting (MPM) held last week, the Bank updated its projections
for Japan's economic activity and prices through fiscal 2019 and released them in the
October 2017 Outlook for Economic Activity and Prices (Outlook Report). Today, I would
like to talk about the Bank's outlook for Japan's economic activity and prices as well as its
thinking behind the conduct of monetary policy, while outlining the Outlook Report.
I. The Current Situation of Japan's Economic Activity and Its Outlook
Let me start by talking about economic developments. Japan's economy is expanding
moderately, with a virtuous cycle from income to spending operating. The real GDP has
continued to improve steadily; the output gap that shows the utilization of capital and labor
exceeded the long-term average of 0 percent in the second half of 2016, and has widened
further in positive territory recently (Chart 1). In the Bank's September 2017 Tankan
(Short-Term Economic Survey of Enterprises in Japan), the diffusion index (DI) for
business conditions marked a high level last seen in 1991.
One of the features of the current economic recovery is the length of the recovery period.
According to the government, the current recovery phase, which started in December 2012,
is highly likely to have lasted for 58 consecutive months by September this year. This
represents the second longest period of economic recovery in the post-war era, longer than
Izanagi Boom
the in the second half of the 1960s. During the course of the recovery, in
around 2015, for example, Japan's exports temporarily turned to a decline against the
background of a slowdown in emerging economies. For the past year or so, however, the
economic recovery has taken hold more firmly. Furthermore, I think that the recovery has
become more sustainable for the following three reasons.
The first reason is that the global economy has continued to improve in a well-balanced
manner. Both the advanced and emerging economies have continued to improve, supporting
Japan's economic expansion. The positive effects of the recovery in the world trade volume
are spreading across the world, including to Japan. In the World Economic Outlook (WEO)
released by the International Monetary Fund (IMF) last month, growth projections have
continued to be revised upward for many countries and regions, and the global economy is
expected to continue its firm growth, with the real GDP growth rate rising from 3.2 percent
in 2016 to 3.6 percent in 2017 and 3.7 percent in 2018 (Chart 2). Last month, I attended a
number of international meetings, including the Group of Twenty (G-20) meeting held in
Washington D.C., and it was striking that many participants referred to "synchronous
growth" of the global economy.
The second reason is that Japan's economic growth has been led by both external and
domestic demand in a well-balanced manner. Japan's exports have increased -- mainly led
by automobile-related and IT-related exports -- on the back of the growth in overseas
economies. In addition to such strong external demand, domestic demand has been on an
increasing trend. Specifically, business fixed investment has been on a moderate increasing
trend, while corporate profits have marked record high levels (Chart 3). Private
consumption has increased its resilience, supported by steady improvement in the
employment and income situation as well as replacement demand for durable goods. Public
investment also has been increasing clearly since the turn of the fiscal year. These
developments show that the current economic expansion is not relying on a single factor,
but rather is supported by multiple factors. Therefore, the Bank views that the expansion is
quite sustainable.
The third reason is that the effects of economic expansion have been spreading to a wide
range of economic entities. The business conditions DI in the Tankan has continued to be
positive in recent quarters, even in small firms and nonmanufacturing firms. This is clearly
different from the recovery phase in the mid-2000s, in which the DI improved mainly for
large firms and manufacturing firms (Chart 4). Looking at developments by region, the DI
has been positive for all regions since the December 2013 survey. In addition, in the Bank's
Regional Economic
October 2017 Report, all nine regions across the country showed
positive economic assessments, using phrases such as moderate recovery and expansion. Of
the nine regions, the Tokai region has been the frontrunner of economic expansion. In the
latest Regional Economic Report, the Bank's Nagoya Branch revised its economic
assessment of the Tokai region upward to one stating that the economy "has been
expanding" from the previous one stating that it "has been expanding moderately." The
Tokai region is the only region that assesses the economy as having been expanding. As the
region is one of the largest manufacturing centers in Japan, it has benefitted from the global
economic recovery and stable exchange rates. However, these factors alone cannot explain
its recent strong growth. I feel that your various management efforts, including strategic
investment for future development, have paid off and led to the strength in this region's
economy.
As I have explained so far, in Japan's current economic recovery, both external and
domestic demand have been increasing in a well-balanced manner, and the effects of
economic expansion have been spreading to a wide range of economic entities, with
overseas economies continuing to grow at a moderate pace. Under the circumstances, labor
market conditions have tightened further. The active job openings-to-applicants ratio has
continued to rise, marking 1.52 for September and reaching a level seen in 1974 (Chart 5).
The unemployment rate has declined to the range of 2.5-3.0 percent, which is equivalent to
virtually full employment. Against the background of such tightening of labor market
conditions, wages have risen moderately, mainly for part-time employees.
Next, I would like to talk about the outlook for Japan's economic activity. The Bank projects
that Japan's economy is likely to continue its moderate expansion on the back of highly
accommodative financial conditions and the effects of the government's large-scale stimulus
measures, with overseas economies continuing to grow at a moderate pace. In the October
Outlook Report, the medians of the Policy Board members' forecasts of the real GDP
growth rates for fiscal 2017 and 2018 are 1.9 percent and 1.4 percent, respectively (Chart 6).
These figures are above Japan's potential growth rate, which is estimated to be in the range
of 0.5-1.0 percent. In fiscal 2019, although the growth pace is projected to decelerate, the
economy is expected to continue expanding, underpinned by the increase in exports on the
back of the growth in overseas economies, and the median of the forecasts of the real GDP
growth rate is 0.7 percent.
There are, of course, upside and downside risks to this baseline scenario of the outlook for
Japan's economic activity. The biggest risk factor is developments in overseas economies.
As I have explained, overseas economies are expected to continue growing at a moderate
pace, but the U.S. economic policies and their impact on global financial markets warrant
attention. Risks also include those concerning developments in emerging and
commodity-exporting economies as well as geopolitical issues. If these risks were to
materialize, they could exert downward pressure on economic activity. On the other hand,
we also should keep in mind that, given that market participants and economic entities
already factor these risks in to a certain extent, the economy could deviate upward from the
baseline scenario depending on how they play out. The Bank assesses that upside and
downside risks to economic activity are generally balanced, but will examine both risks
thoroughly.
II. Price Developments and their Outlook
Now I will move to price developments. The year-on-year rate of change in the consumer
price index (CPI) excluding fresh food has risen somewhat, reflecting an increase in energy
prices, and has been in the range of 0.5-1.0 percent (Chart 7). The rate of change in the CPI
excluding fresh food and energy, however, has remained slightly positive despite the
economic expansion and the tightening of labor market conditions. While this is partly
attributable to temporary factors, including a reduction in mobile-phone related prices, this
also reflects the fact that a wide range of firms have been making efforts to absorb a rise in
wage costs by increasing labor-saving investment and streamlining their business process.
As just described, price developments have remained relatively weak, but the Bank projects
that the year-on-year rate of change in the CPI is likely to continue on an uptrend and
increase toward the price stability target of 2 percent.
Specifically, the following mechanism is assumed. First, prices of items such as processed
food and daily necessities -- which are responsive to economic activity -- are likely to rise
gradually as private consumption improves moderately, and the yen's depreciation as well as
the pick-up in crude oil prices to date are expected to push up import prices. Second, as the
economy continues to expand moderately and the output gap improves further, firms' stance
is likely to gradually shift toward raising wages and prices, and the inflation rate is
projected to rise in line with wage increases. Third, with these factors pushing up actual
inflation, a virtuous cycle is expected to operate in which people's inflation expectations rise
accordingly, leading to a further increase in actual inflation. Bearing this mechanism in
mind, the October Outlook Report shows that the medians of the Policy Board members'
forecasts of the year-on-year rate of change in the CPI excluding fresh food are 0.8 percent
for fiscal 2017, 1.4 percent for fiscal 2018, and on a basis excluding the effects of the
consumption tax hike, 1.8 percent for fiscal 2019 (Chart 6).
Firms' price-setting stance going forward is the key to the Bank's outlook for prices. Firms
that have faced a rise in labor costs due to tight labor market conditions are likely to
consider passing on a rise in wage costs to prices of their products and services. At the same
time, they often try to absorb the rise in wage costs and keep their prices unchanged mainly
through labor-saving and efficiency-improving investment that makes use of information
technology. In fact, software investment plans of small firms for fiscal 2017 have marked a
significant increase of more than 20 percent on a year-on-year basis (Chart 8). In addition,
many firms lately are trying to absorb the rise in wage costs by streamlining the existing
business process. In other words, they are making efforts to reduce services for which labor
costs are too high to make profits. These firms' efforts make it possible to restrain an
increase in total labor costs even if hourly wages of employees rise, thereby containing the
passing on of those costs to product prices. While these efforts are based on individual
firms' reasonable business strategy with a view to raising productivity, on the price front,
they would reduce the upward pressure on prices at least in the short run.
However, the Bank does not expect that this situation will last for a long time. Rather, it
assesses that upward pressure on prices has been increasing gradually. I would like to
highlight the following three points as the recent change in the environment surrounding
prices.
First, labor market conditions have tightened significantly, with the annual rate of increase
in hourly wages of part-time employees reaching around 2.5 percent; as a result, the upward
pressure of the rise in firms' costs on prices has been increasing steadily. Under such
circumstances, in parallel with the aforementioned efforts to streamline their business
process, an increasing number of firms have been working on passing on the increased costs
that they cannot absorb to their sales prices (Chart 9). In the transportation industry, where
labor shortage is acute, one of the major companies announced this spring that it planned to
raise the prices of its home delivery services, and competitors followed suit. This episode
suggests that upward pressure on prices stemming from the rise in wage costs has been
mounting.
Second, consumers' and customers' perception of price rises has been changing. As the
employment and income situation in the household sector has improved, it seems that
consumers are gradually accepting price rises. Recently, it is reported more frequently that
some firms in the restaurant business, for example, decided to raise prices for the first time
in a while. It looks as though firms that had been hesitant to raise prices for many years are
encouraged by the increase in consumers' appetite for spending.
Third, it appears that investors have started to consider the recent price rises as positive
developments. Among budget chain restaurants listed on the Tokyo Stock Exchange, there
have been some cases where the announcement of price rises was received positively and
stock prices increased sharply. I feel it was often the case in the past that investors were
rather concerned about the declines in the number of customers and sales as a result of price
rises. Recently, however, it seems that investors are expecting an increase in profits instead.
Amid changes in firms' price-setting stance and in consumers' perception of price rises, it
appears that investors are starting to appreciate these developments.
Indeed, the specific timing at which each firm's stance shifts toward raising prices is likely
to vary, depending on developments in demand that each firm and industry faces or on the
extent of the rise in wage costs. In this regard, there is a risk that a rise in inflation
expectations will lag behind if it takes time for firms' stance to shift toward raising prices
and price developments remain relatively weak. However, the Tokai region -- the
frontrunner of Japan's economic expansion -- has shown a rise in the active job
openings-to-applicants ratio to 1.8, indicating that the region's labor market conditions are
much tighter than those of the national average. I believe that a favorable environment has
been put in place in which wage increases stimulate consumers' appetite for spending,
leading to firms' bullish price-setting stance.
III. The Bank's Conduct of Monetary Policy
Next, I will talk about the Bank's conduct of monetary policy. The Bank has been
conducting "Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve
Control" with the aim of achieving the price stability target of 2 percent. This framework
consists of two components (Chart 10).
The first is an inflation-overshooting commitment. This is a strong commitment that the
Bank will continue expanding the monetary base until the year-on-year rate of increase in
the actual CPI exceeds 2 percent and stays above that level in a stable manner. It is crucial
that people actually experience inflation above 2 percent 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 has committed itself to continuing with large-scale
monetary easing until such situation is achieved.
The second component is yield curve control. The Bank continuously conducts purchases of
Japanese government bonds (JGBs) to facilitate the formation of the yield curve that is
considered most appropriate for achieving the price stability target of 2 percent at the
earliest possible time. Under this framework, the yield curve has been formed smoothly in a
manner consistent with the current guideline for market operations in which 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 zero percent.
Under the Bank's yield curve control, JGB yields -- which are the base interest rates in
Japan -- have been stable at low levels; as a result, bank lending rates as well as issuance
rates for CP and corporate bonds -- to which certain spreads are added in both cases -- also
have remained at extremely low levels (Chart 11). The amount outstanding of bank lending,
as well as of CP and corporate bonds, has been increasing firmly. These developments
suggest that the current highly accommodative financial conditions, brought about by yield
curve control, have been strongly supporting Japan's economic activity from the financial
side.
As described in the October Outlook Report, the Bank is also aware that prolonged
downward pressure on financial institutions' profits under the continued low interest rate
environment could create risks of a gradual pullback in financial intermediation. At this
point, this risk is judged as not significant, mainly because financial institutions have
sufficient capital bases; however, the Bank will keep closely monitoring the effects of the
continued low interest rate environment on the functioning of financial intermediation.
As I mentioned today, price developments in Japan have been relatively weak compared
with the improvement in economic activity, and there is still a long way to go to achieve the
price stability target of 2 percent. Going forward, however, firms' stance is likely to
gradually shift toward raising wages and prices with the further improvement in the output
gap. People's medium- to long-term inflation expectations are projected to rise steadily as
further price rises come to be observed widely. With these positive developments persisting,
the Bank will steadily proceed toward achieving the price stability target of 2 percent.
Under the current framework of "QQE with Yield Curve Control," the Bank will continue to
persistently pursue powerful monetary easing.
Conclusion
Lastly, I would like to once again touch upon the economy of the Tokai region. As I
mentioned earlier, the region is the frontrunner of economic expansion in Japan. One of the
driving forces of such strong growth is that firms are expected to continue making fixed
investment -- such as in next-generation cars and related to maglev trains -- from a
long-term perspective. I feel that the mindset of firms in this region is always
future-oriented, while also taking the present situation into account. With respect to future
development, there are some challenges ahead for the region. These include (1) what will
happen and what will become possible when, after a decade, a maglev train links the two
major economies -- Tokyo and Nagoya -- in 40 minutes, (2) what the relationship between
people and cars will be after two decades, and (3) how to make the most of firms' expertise,
where Japan's advantage lies, as global manufacturing shifts toward standardizing
production as well as deploying the "Internet of Things (IoT)." As is the case to date, I
believe that you will find solutions to these challenges through persistent efforts. Needless
to say, the biggest challenge is how individual firms and Japan's economy continue to
achieve sustainable growth amid a decline in population. Not much time is left until the
baby-boomer generation fully retires. These challenges are not easy to tackle, but we have
to solve all of them simultaneously. I would like to close my speech by making a
commitment that the Bank will firmly support Japan's economy by persistently pursuing
powerful monetary easing, while trusting that the Tokai region will accumulate the wisdom
and technology to address these challenges. Thank you for your attention.
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Nagoya
November 6, 2017
Haruhiko Kuroda
Governor of the Bank of Japan
Chart 1
Economic Recovery in Japan
Length of Economic
Output Gap
Real GDP
Recovery Period
s.a., ann., tril. yen %
540
4
Rank Period Length
530
2
February
1 73 months
520
2002February 2008
November
510
0
2 1965July 1970 57 months
(Izanagi Boom )
500
-2
December
490 3 1986February 1991 51 months
(Bubble Boom )
480 -4
November
4 43 months
1993May 1997
470
-6
460
months
Current
December 201258
(as of September 2017)
-8
450
CY 17 CY 00 02 04 06 08 10 12 14 16 17
Chart 2
Global Economy and Japan's Exports
Japan's Exports
Global Real GDP Growth
y/y % chg.
s.a.
10 120
9
Real exports (CY 2015=100)
8
110
7
IMF
projection
6
5 100
4
3
90
2
1
0 80
World output
-1
-2
Advanced economies
70
-3
Emerging market and
-4
developing economies
-5 60
05 06 07 08 09 10 11 12 13 14 15 16 17
CY 05 06 07 08 09 10 11 12 13 14 15 16 17 18 CY
2
Sources: IMF; Bank of Japan; Ministry of Finance.
Chart 3
Domestic Demand
Corporate Profits and
Private Consumption
Business Fixed Investment
s.a., ann., tril. yen
s.a., % s.a., CY 2010=100
7 90 108
Ratio of current profits to sales (all industries
and enterprises, left scale)
Consumption Activity Index (travel
6 85 balance adjusted, real)
106
Private nonresidential investment
(SNA, real, right scale)
5 80 104
4 75 102
3 70 100
2 65 98
1 60
96
0 55 94
CY 05 06 07 08 09 10 11 12 13 14 15 16 17 CY 05 06 07 08 09 10 11 12 13 14 15 16 17
Chart 4
Business Conditions DI (Tankan)
By Firm Size
By Industry
DI ("favorable" - "unfavorable"), % points DI ("favorable" - "unfavorable"), % points
30 30
"Favorable"
"Favorable"
20 20
"Unfavorable"
"Unfavorable"
10 10
0 0
-10
-10
-20 -20
-30 -30
Large enterprises
All industries
-40 -40
Medium-sized
Manufacturing
enterprises
-50 -50
Nonmanufacturing
Small enterprises
-60 -60
CY CY
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
4
Source: Bank of Japan.
Chart 5
Labor Market Conditions
Active Job
Unemployment Rate
Openings-toApplicants Ratio
s.a., ratio s.a., %
6
1.6
1.5
1.4
5
1.3
1.2
1.1
4
1.0
0.9
3
0.8
0.7
0.6
2
0.5
0.4
1
0.3
CY 90 92 94 96 98 00 02 04 06 08 10 12 14 16
CY 90 92 94 96 98 00 02 04 06 08 10 12 14 16
5
Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications.
Chart 6
Outlook for Economic Activity and Prices
(as of October 2017)
y/y % chg.
CPI
Real GDP
(all items less fresh food)
Fiscal 2017 +1.9 +0.8
Forecasts made in
+1.8 +1.1
July 2017
Fiscal 2018 +1.4 +1.4
Forecasts made in
+1.4 +1.5
July 2017
Fiscal 2019 +0.7 +1.8
Forecasts made in
+0.7 +1.8
July 2017
Note: Figures indicate the medians of the Policy Board members' forecasts (point estimates). Figures for the CPI (all items less fresh food) exclude the effects of the consumption tax hike.
Source: Bank of Japan. 6
Chart 7
Consumer Prices
y/y % chg.
2
Introduction of QQE
(April 2013)
1
0
-1
CPI (all items less fresh food)
CPI (all items less fresh food and energy)
-2
CY 10 11 12 13 14 15 16 17
Chart 8
Labor-Saving Investment of Small Enterprises
Software Investment of
Employment Conditions DI (Tankan)
Small Enterprises (Tankan)
reversed, DI ("excessive"- "insufficient"), % points
bil. yen
-50 350
FY 2017 (planned)
Small enterprises
y/y % chg. : +22.4%
-40
Large enterprises 300
-30
250
"Insufficient"
-20
200
-10
0
150
10
100
20
50
"Excessive"
30
40 0
FY
CY 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 05 06 07 08 09 10 11 12 13 14 15 16 17
Note: The figure for the software investment plans for fiscal 2017 is from the September 2017 Tankan survey.
8
Source: Bank of Japan.
Chart 9
Change in Output Prices DI (Tankan)
DI ("rise"-"fall"), % points
30
All industries
Transport & Postal activities
20
Forecast
Wholesaling & Retailing
Accommodations, Eating & Drinking services
10
0
-10
-20
-30
-40
CY 05 06 07 08 09 10 11 12 13 14 15 16 17
Chart 10
QQE with Yield Curve Control
Inflation-Overshooting Commitment Yield Curve Control
%
Inflation rate 1.2
JGB yield curve
1.0
0.8
Short-term
Target level of
policy interest the long-term
rate interest rate
0.6
"minus 0.1
"around zero
2%
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
10
Source: Bloomberg.
Chart 11
Effects of Monetary Policy
Amount Outstanding of Bank
Bank Lending Rates and Issuance Yields
Lending, CP, and Corporate Bonds
for CP and Corporate Bonds
%
y/y % chg.
1.6 10
Bank lending rates (total)
Lending by domestic
Introduction of QQE
Introduction of QQE
1.4 8 commercial banks
CP (3-month, a-1)
CP and corporate bonds
Corporate bonds (AA)
6
1.2
1.0 4
0.8 2
0.6 0
0.4 -2
0.2 -4
0.0 -6
CY CY 10 11 12 13 14 15 16 17