Kiyohiko G Nishimura: Toward overcoming deflationary pressures in
Japan
Speech by Mr Kiyohiko G Nishimura, Deputy Governor of the Bank of Japan, at a meeting
with business leaders, Okayama, 18 April 2012.
* * *
Introduction
I am privileged and honored to be here today to exchange views with administrative and
business leaders in Okayama Prefecture. I deeply appreciate your continuing support and
cooperation in taking part in interviews and surveys conducted by our Okayama branch. The
quantitative and qualitative information from these interviews and surveys is invaluable to
making timely assessments of economic conditions, and thus appropriate policy decisions.
This can be especially true in the case of great uncertainty that follows events that profoundly
alter economic and financial conditions, such as the Lehman Shock and the Great East
Japan Earthquake. Although those events effectively render past statistical data
uninformative or even utterly useless, the Bank cannot delay its policy responses just for the
sake of waiting for new data to be released. Even in situations such as these, our regular
contact with you provides us with valuable information about what is really happening in the
real world in various respects. In fact, our colleagues at foreign central banks consider the
Bank of Japan as fortunate and privileged in this regard. I would like to express my sincere
gratitude and also ask for your continued cooperation.
Let me start today by discussing the economic outlook at present and its risk factors. After
that, I would like to share the Bank's basic thinking on the necessary measures to overcome
deflationary pressures. Furthermore, I will explain the Bank's policy responses geared toward
this aim - as put forth during the February and March Monetary Policy Meetings - by
answering frequently asked questions. In closing, I would like to touch upon some relevant
issues for the economy in Okayama Prefecture.
I. Economic outlook at present and its risk factors
A. Economic outlook at present
Let me first describe the current domestic and overseas economic conditions and the outlook
at present.
First, I will start with developments overseas. Despite the recent nervousness seen in the
foreign exchange and stock markets, the funding environment for financial institutions in
global financial markets has been calm and stable against the background of ample liquidity
provision by the European Central Bank and certain progress in efforts to support Greece.
However, overseas economies as a whole have yet to emerge from a deceleration phase. In
the United States, although some improvements have been observed in consumption and
employment, such positive movements have not yet gained momentum, as evidenced by the
recent weaker-than-expected employment statistics. Against such a background, Japan's
exports and production have not emerged from the phase of crawling growth, and thus the
country's economic activity remains more or less in a lull. However, domestic demand has
recently shown some signs of improvement. Steps toward restoration and rebuilding
following the Great East Japan Earthquake are progressing, most notably in business fixed
investment. Private consumption has firmed up due in part to the effects of measures to
stimulate demand for automobiles, such as the reintroduction of subsidies for purchasing
energy efficient cars and the release of popular models of new cars. Industrial production has
begun to show signs of a possible improvement. As for the outlook, Japan's economy is
expected to return to a moderate recovery path 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 disaster gradually strengthens.
B. Risk factors
Whether or not this projection is going to be realized depends on various risk factors. The
one that the Bank is most concerned with is, in short, uncertainties regarding the global
economy. Among them - including the prospects for the European debt problem,
developments in international commodity prices, and the likelihood of emerging and
commodity-exporting economies maintaining growth under price stability - I regard whether
improvement in economic indicators in the United States can continue or not as particularly
important and deserving of very careful monitoring, as this is attracting wide attention
recently.
The sustainability of the ongoing U.S. recovery requires careful examination, for two reasons.
First, in the United States, there is rising bifurcation of the labor market into two groups:
(1) those who have no concern about their employment and (2) those who do. The recent
firm economic indicators reflect a recovery in consumption by the former group, which
benefited from a decline in mortgage rates and rising stock prices. However, the
distinguishing feature of the current business cycle has been a large increase in the number
of the latter group - i.e., those who have concerns about their employment - and its size has
not decreased notably even in the recovery phase. This could weigh on the U.S. economic
recovery ahead.
Second, there is a possibility that a seasonal adjustment method used for major
U.S. economic data had created some distortions due to the effects of the Lehman Shock,
causing the data for the period from winter to early spring to be overvalued and those for the
period toward summer to fall to be underestimated. If this is the case, it means that the
favorable data so far have exaggerated actual economic performance and the forthcoming
data will be disappointing - showing a weaker picture than actual conditions. Attention
should be paid to the risk that such distorted data could weaken expectations for recovery
held by firms, households, and markets.
As a longer-run risk for many economies, prolonged stagnant economic performance
coupled with the aging of a population could reduce the flexibility of the economy such as in
terms of the mobility of people across sectors and regions, thereby making it more difficult for
the supply side to respond smoothly to changes in the demand structure. As a result, growth
potential could decrease. Such a reduction in the flexibility of the economy amid a situation of
an aging population has become a serious problem not only in Japan but also in other
advanced countries, such as the United States and Europe. Even emerging economies,
including those in Asia, are not immune to this problem because the aging population
problem is set to intensify considerably within the next ten years and it is not unimaginable
that early indications of the problem could emerge in the very near future.
Bearing in mind that there are various risk factors, the Bank will conduct a thorough review of
the outlook for economic activity and prices and will issue the results in our biannual outlook
report, to be released at the end of this month.
II. Toward overcoming deflationary pressures
Next, I would like to turn to the challenge of overcoming deflationary pressures. In order for
Japan's economy to make steady progress toward overcoming deflationary pressures, it is
necessary to make efforts on the following two fronts.
The first one involves continual support of the recent momentum toward economic recovery
to enhance the level of economic activity. In this regard, it is important to make steady
progress in narrowing the negative output gap by firmly supporting positive developments at
home and abroad.
Second, it is necessary to make efforts to tackle the long-term structural problem that
Japan's economy has confronted of declining trend growth rates. It is no easy task to raise
the growth potential of Japan's economy when the working population decreases due to
aging. In order to raise the growth potential of Japan's economy by capturing new demand, it
is crucial that business firms, financial institutions, the government, and the Bank each take
decisive measures in their respective roles.
One possible direction is for Japanese firms to tap global demand, mainly in emerging
economies, by undertaking a reappraisal of their comparative advantages, such as the
capacity to develop new materials, "integral-type technology", production efficiency, and
attentive customer service, in pursuit of a best mix of these advantages that fits with
respective market demand. In this regard, manufacturers continue to expand their overseas
business while reestablishing global production and sales networks. Recently, more firms in
domestic demand-oriented industries have also started making efforts to capture global
demand. What is important is to establish a favorable domestic business environment so that
firms' active movements to capture global demand lead to enhancing the growth potential of
Japan's economy rather than causing a hollowing-out of domestic industries. At the same
time, efforts to stimulate domestic demand are also crucial. From the standpoint of
enhancing the growth potential of Japan's economy, it is an extremely important challenge to
make steady progress in regulatory reform to promote growth industries and in supplying risk
money to them, so that seeds for growth are produced, sprout, and evolve into flourishing
domestic demand.
III. The Bank of Japan's policy measures
Next, I would like to touch on the Bank's policy measures. As I have stated so far, in order to
overcome deflationary pressures and achieve sustainable growth with price stability, it is vital
to make efforts both to firmly support the recently observed upward momentum toward
economic recovery and to strengthen growth potential. Based on its recognition of this point,
the Bank launched a policy package to overcome deflationary pressures at the Monetary
Policy Meetings held in February and March. I will briefly describe the essence of the
package.
A. Policy measures in February: introduction of "The Price Stability Goal in the
Medium to Long Term", clarification of the Bank's commitment regarding the
policy time horizon, and expansion of the asset purchase program in size
At the Monetary Policy Meeting held on February 12 and 13, 2012, the Bank decided three
measures.
First, it introduced "the price stability goal in the medium to long term". This represents the
price stability that the Bank should aim to achieve using the year-on-year rate of increase in
the consumer price index (CPI). The Bank judges the "goal" to be within a positive range of
2 percent or lower in terms of the year-on-year rate of change in the CPI, and it set a goal of
1 percent for the time being. In deciding a specific inflation rate, the Bank considered that
(1) there is considerable uncertainty surrounding the prospects for Japan's economy
because it is in a process of transition to a normal growth path following long-term
stagnation, and therefore (2) deliberations should fully take into account the perception of
price developments held by the general public, which is used to long periods of low inflation
rates, including even the period of the financial bubble prior to the 1990s. As a result, the
Bank decided to set a specific goal of 1 percent for the time being, and from a longer-term
perspective, to express the goal with a degree of latitude as "a positive range of 2 percent or
lower" given the possibility that the inflation rate the Bank should aim to achieve could rise
due to changes in the economic structure at home and abroad.
Second, the Bank clarified its commitment regarding the time horizon for pursuing powerful
monetary easing. By promising accommodative monetary policy in the future, based on
certain conditions regarding the economic environment, the commitment aims to strengthen
the immediate monetary easing effects by bringing forward future easing effects. In line with
the introduction of "the price stability goal", the Bank decided at the February meeting that it
will aim to achieve the goal of 1 percent CPI inflation and will continue the pursuit of powerful
monetary easing until the goal is in sight, conducting its virtually zero interest rate policy and
implementing the Asset Purchase Program mainly through the purchase of financial assets.
The Bank clarified its stance to actively take policy measures by expressing the specific
inflation rate of 1 percent as a goal and using the phrase "aim to achieve" with respect to said
goal. The Bank also stated specifically that it will continue to not only conduct its virtually
zero interest rate policy, but also implement the Asset Purchase Program mainly through the
purchase of financial assets until the conditions in the commitment are met.
Third, the Bank made a decisive increase in the total size of the Asset Purchase Program, of
10 trillion yen. As a result, together with its regular purchases for the purpose of supplying
currency consistent with underlying steady development in the economy, the Bank is going to
purchase a large amount of JGBs until the end of this year, at the pace of about
40 trillion yen per year.
The aforementioned three measures are aimed at strongly supporting recent positive
momentum from the financial side through a clarification of the Bank's policy stance to
overcome deflationary pressures and an enhancement of its pursuit of powerful monetary
easing.
B. Policy measures in March: enhancement of fund-provisioning measure to
support strengthening the foundations for economic growth
At the subsequent Monetary Policy Meeting in March, the Bank decided to enhance the
fundprovisioning measure to support strengthening the foundations for economic growth
(hereafter referred to as "the Growth-Supporting Funding Facility"). The Growth-Supporting
Funding Facility supplies long-term funds at a low interest rate to financial institutions in
accordance with their efforts - in terms of lending and investment - toward strengthening the
foundations for economic growth. Looking at the composition of the areas to which financial
institutions have been lending and investing using this facility, "environment and energy
business" and "medical and nursing care business" accounted for a large share. Let me
share with you some examples of actual lending or investment based on information made
public by financial institutions. For example, there was a project in which the manager of a
nursing home for the elderly upgraded the air-conditioning system to an eco-friendly one that
recovered waste heat. In another case, food manufacturers made investments for the
purpose of expanding their production sites in emerging Asian economies, so as to respond
to vigorous demand from such economies.
Taking into account the lending and investment conducted under the facility, the Bank
decided to establish special rules, first, for a new lending arrangement for small-lot
investments and loans and, second, for a new U.S. dollar lending arrangement for foreign
currency-denominated investments and loans. The Bank also decided to increase the
maximum outstanding balance of loans under the main rules for the facility, which raised the
overall outstanding balance of loans available through the facility by 2 trillion yen. The Bank
also decided to extend the deadline for applications for new loans under the facility, by
two years.
Such measures are aimed at further enhancing the Bank's efforts to strengthen growth
potential, which is another pillar for overcoming deflationary pressures.
IV. Has the Bank changed?
The series of policy measures by the Bank - especially its decision in February to clarify its
policy stance and further enhance monetary easing - took many market participants by
surprise, since few had predicted such responses. Following the Bank's decision, stock
prices rose and the yen depreciated. These developments were of course significantly
influenced by some new positive worldwide developments at that time, such as diminishing
perceived risks from the European debt problem and relatively firm improvement in the
U.S. economy. In addition, I believe that the Bank's clarification of its policy stance, which
was taken as a positive surprise, also had a considerable impact on those market
developments.
I am often asked whether the Bank's policy objectives, basic thinking behind the conduct of
monetary policy, and policy stance have changed since its decision in February. Next, I
would like to outline my understanding of what has changed and what has stayed the same
with regard to the Bank's policy conduct.
A. Question: has the aim of the Bank's monetary policy changed?
With regard to the introduction of "the price stability goal in the medium to long term" in
February, a frequent interpretation is that the Bank has finally adopted the so-called "inflation
targeting framework". I would like to outline my reflections on this point by asking the
following question: "has the aim of the Bank's monetary policy changed?"
The Bank's basic thinking about the price stability that a central bank should aim to achieve
includes the following three elements. First, "price stability" is a state where economic agents
such as households and firms may make decisions regarding economic activities without
being much concerned about the fluctuations in the general price level. Second, central
banks should pursue "price stability" over the medium to long term that should not be judged
by short-term developments in the recent period. Third, "price stability" should be expressed
in numerical terms using indicators that cover goods and services consumed by households
and represent the public's true feelings regarding price developments. This basic thinking
had been explained to the public before the introduction of "the price stability goal in the
medium to long term", and has not changed with this introduction.
That being said, I believe that the introduction of "the price stability goal" in place of the old
"understanding of medium- to long-term price stability" is significant as an effort to specifically
express what the Bank pursues based on its basic thinking on price stability. When
conducting monetary policy, each Policy Board member makes decisions based on their own
thinking on price stability that should be pursued by the Bank. The old "understanding"
showed the range of inflation rates that each Policy Board member understood as
numerically expressing price stability over the medium to long term. There should be no
confusion, since if inflation rates fail to be within this range, then it is obvious that price
stability has not been achieved from any of the members' perspectives. However, there was
a criticism that the old "understanding", which was a collection of individual Board members'
views, did not represent the "price stability" that is the basis of the policy decisions of the
Bank as an institution. In addition, there was some difficulty with the word "understanding", in
that it failed to deliver the message that the Bank was making active moves toward price
stability. Taking account of these problems, the Policy Board members have made a
collective decision on how to express the price stability that the Bank should aim to achieve.
They have also decided to use the word "goal", so that the Bank's policy stance can be
understood clearly.
I would like to point out that there is a notable feature in the introduction of the "goal". That is,
the "goal" for the time being is set differently from the "goal" from a longer-term perspective.
The Bank has decided to set a specific inflation rate goal for the time being - a rate that it
currently aims to achieve - even though there is considerable uncertainty surrounding the
prospects for Japan's economy, such as in terms of changes in economic structures. At the
same time, from a longer-term perspective, if the efforts to strengthen growth potential
successfully boost real growth rates to an adequate level in a sustainable manner, then the
medium- to long-term sustainable inflation rate - and consequently, the nominal growth rate -
will gradually rise. Bearing in mind such a possibility from a longer-term perspective, the
Board has decided to express "the goal for price stability in the medium to long term" with a
degree of latitude as "a positive range of 2 percent or lower in terms of the year-on-year rate
of change in the CPI" and to review the "goal" once a year in principle.
As long as the Bank's thinking behind the "the price stability goal in the medium to long term"
is shared correctly, it is not essential to argue about what it should be called. I feel no
discomfort in referring to the "goal" as a flexible inflation target.
B. Question: was the policy change in February based on the assessment from
the "Two Perspectives"?
Next, let me take up the issue of how difficult it was to predict the February decision to
enhance monetary easing. Since March 2006, in deciding the conduct of monetary policy,
the Bank has been examining economic activity and prices from two perspectives. The first is
in terms of whether the baseline scenario of the outlook for economic activity and prices
follows a sustainable growth path with price stability. To put it another way, using the new
framework, this is with regard to whether the economy is heading toward achieving the "price
stability goal". The second perspective is in terms of what kind of risk factors are considered
relevant to the baseline scenario. I would like to examine the market comments that the
policy change in February was difficult to predict because such a decision could not be
derived from the monetary policy framework based on the assessment from the two
perspectives.
At the time of the February Monetary Policy Meeting, some positive developments were
observed in domestic and overseas economies, such as receding tensions in global financial
markets, some improvement observed in the U.S. economy, and the firm domestic demand
due in part to reconstruction-related demand after the earthquake disaster. However, Japan's
economic conditions continued to be harsh with the level of economic activity not having
recovered from the plunge after the Lehman Shock, due to the slowdown in the overseas
economies and the appreciating yen. At the same time, as you can find in the Minutes of the
Monetary Policy Meeting in January 2012, the following recognition had been gradually
spreading among Policy Board members during the process of discussing prolonged
deflationary pressures: the Bank's intention in its conduct of monetary policy might not have
been fully understood by firms, consumers, and markets since the Bank's communication
had not been effective enough, and consequently the effects of powerful monetary easing
have been considerably diminished. In addition, market participants and the media renewed
their attention on the central bank's policy stance toward achieving price stability triggered by
the U.S. Federal Reserve's decision on January 25, 2012 to set the inflation rate of 2 percent
as its "longer-run goal".
Thus, the Bank faced a situation where, from the perspective of achieving the "goal", it
needed to consider the risk that the effects of monetary easing that was designed to achieve
the baseline scenario had been noticeably compromised. Taking into account such a
situation, the Policy Board recognized that it was necessary to communicate the Bank's
policy stance clearly in order to ensure the realization of the baseline scenario so that the
"goal" would be achieved, and if the Bank did not take such action, more time might be
needed to achieve the "goal". This led the Bank to make a policy decision at the February
meeting. Also, to make its intention clear, the Bank decisively increased the total size of the
Asset Purchase Program. It deemed that such a decision would strongly support the positive
momentum observed at that time from the financial side, and that it would bring about visible
effects of monetary easing.
Even after replacing the "understanding" with the "goal", the Bank continues to conduct
monetary policy based on the assessment from the two perspectives. It had been quite
unfortunate that, until last February, the Bank's policy stance was not well communicated in
an effective manner and thus not fully understood. The introduction of the "goal" was
received with some surprise partly because of this communication problem. The Bank
introduced the "goal" with the clear aim of solving this problem, and will continue to make
further efforts to enhance its communication.
C. Question: has the possibility of further monetary easing increased?
I will now make my best effort to provide an answer to the following difficult question. Has the
Bank's monetary policy stance become more dovish after all? In other words, has the
possibility of further monetary easing increased?
As I have already stated, the Bank's stance has not changed toward the conduct of monetary
policy based on the "price stability goal" and the assessment from the "two perspectives".
Allow me to repeat the Bank's current monetary policy stance: "[The Bank] will aim to
achieve the goal of 1 percent CPI inflation and continue the pursuit of powerful monetary
easing until the goal is in sight, conducting its virtually zero interest rate policy and
implementing the Asset Purchase Program mainly through the purchase of financial assets."
As stated in the Minutes of the Monetary Policy Meeting in February 2012, the described
policy stance shows that the Bank is committed to implementing additional easing measures,
if deemed necessary. The clarification of the Bank's determination to overcome deflationary
pressures has been understood in financial markets more clearly and widely than before. I
think this might have given the impression to some that the Bank has changed.
After all, the Bank's policy decision depends on the outlook for economic activity and prices
and on the results of the assessment of risk factors in the context of achieving the "price
stability goal". An examination of policy effects is also important. It is often said that there is
considerable uncertainty regarding when the effects of monetary policy will emerge, because
they often come with a variable time lag (sometimes long). Unconventional policy measures
taken recently are no exception.
As I have stated, although positive momentum has been observed in Japan's economy,
there remains considerable uncertainty, mainly regarding the outlook for the global economy.
There is also non-negligible uncertainty about how the policy changes in February and March
will affect the public's medium- to long-term expectations regarding economic activity and
prices. The Bank would like to conduct appropriate monetary policy while taking fully into
account such risk factors and examining the outlook for economic activity and prices.
Concluding remarks
Let me briefly touch upon some relevant issues for the economy in Okayama Prefecture.
I stated a short while ago that, in order to overcome deflationary pressures, (1) efforts to
strengthen growth potential are crucial and (2) business firms, financial institutions, the
government, and the Bank should make such efforts within their respective roles. From this
standpoint, let me take a look at the efforts being made in Okayama Prefecture. Several
projects have been actively conducted to develop industries that have growth potential
- such as aircraft-related and medical and nursing care industries - into key industries, with
the government and the private sector working together. Firms in the chemicals and steel
businesses - which have been the main industries in this region - have been making efforts
to develop new products and business plans targeted at environment- and energy-related
sectors using the skills they have acquired so far. Meanwhile, financial institutions have
taken steps to develop a system to firmly support, from the financial side, firms' efforts to
strengthen growth potential while using the Bank's Growth-Supporting Funding Facility. In
addition, I have heard that academics have made unique proposals for urban development
using technological knowledge acquired from universities and university hospitals. I am
thrilled to hear that substantive efforts to strengthen growth potential have been made in
various areas. I truly hope that these various efforts align further with each other and lead to
strong economic growth, not only in Okayama but in Japan as a whole.
Thank you for your kind attention.