September 1, 2021
Bank of Japan
Japan's Economy and Monetary Policy
Speech at a Meeting with Local Leaders in Hiroshima
(via webcast)
WAKATABE Masazumi
Deputy Governor of the Bank of Japan
Introduction
Good morning. It is my pleasure to have the opportunity today to exchange views with
leaders in administrative, economic, and financial areas in Hiroshima Prefecture, although it
is most regrettable that this meeting had to be held online due to the continuing impact of
the novel coronavirus (COVID-19). First of all, I would like to offer my heartfelt
sympathies to those who are suffering from the heavy rain that occurred in August. In
addition, I would like to take this chance to express my sincere gratitude for your
cooperation with the activities of the Bank of Japan's Hiroshima Branch. Today, September
1st, is the day the Hiroshima was established in 1905. It is a great honor to hold
sub-branch
this meeting on this anniversary.
Speaking of the anniversary, this year marks a century since the publication of Risk,
Uncertainty and Profit by the American economist Frank H. Knight and A Treatise on
Probability by the British economist John M. Keynes.1 Both of them make distinctions
between risks, which can be measured by normal statistical probability, and "true,"
fundamental uncertainties, which cannot be explained by probability theory and thus are
unmeasurable. They both emphasize the importance of true uncertainties in economic
society. It seems that such uncertainties remain with regard to and its impact on
COVID-19
the economy. In my speech today, while focusing on uncertainties, I will first outline the
current situation of and outlook for Japan's economy, and then explain the challenges for
central banks today, including the thinking behind central bank efforts to address climate
change. Lastly, I will talk about recent and future economic activity in Hiroshima
Prefecture.
I. Current Situation of and Outlook for Japan's Economy
A. Economic Developments and Mechanism for Recovery
Let me start with economic developments. Domestic and overseas economies have
experienced significantly large changes since last year, mainly due to the impact of
COVID-19, and it is more necessary than before to carefully interpret various economic
indicators.2 With this in mind, let me explain the current situation of Japan's economy. The
economy has remained in a severe state, mainly for the household sector, due to downward
pressure stemming from (Chart 1). The real GDP growth rate, which excludes
COVID-19
the effects of price fluctuations, was negative for the quarter of 2021,
January-March
mainly because of a decline in private consumption. Thereafter, the rate for the
April-June
quarter remained more or less flat and real GDP is still below the level. That
pre-pandemic
said, the Bank judges that the trend in the economy as a whole has been maintained,
pick-up
supported by positive developments in the corporate sector on the back of a firm recovery in
overseas economies. Regarding the outlook, positive developments are likely to spread from
the corporate sector to the household sector as the impact of wanes gradually,
COVID-19
mainly due to progress with vaccinations, and the economic recovery is expected to become
clear.
The key to realizing this outlook is whether a virtuous cycle operates firmly; in other words,
whether an increase in domestic and overseas demand expands household income and
corporate profits, and in turn leads to a further rise in spending (Chart 2). Looking back at
the past period of deflation, a vicious cycle continued, in that households and firms became
reluctant to consume or invest and postponed spending, which consequently decreased
income and led to a further decline in spending. This vicious cycle ended with the
introduction of quantitative and qualitative monetary easing (QQE) in 2013. Thereafter,
2
Specifically, attention should be paid to the following points: (1) the base effects, in which a
rebound from the previous year's significant declines in economic activity and price levels
arithmetically gives high economic growth and inflation rates this year, and (2) the compositional
effects, in which average wages apparently heighten since workers with relatively low wages
become unemployed. These effects have been seen in other countries, as have been referred to in the
following speech: Bailey, A., "It's a Recovery, but Not as We Know It," speech given at the Mansion
House, July 1, 2021, https://www.bankofengland.co.uk/speech/2021/july/andrew-bailey-speech
-at-the-mansion-house-financial-professional-services-event.
amid a virtuous cycle operating between income and spending, Japan's economy has
managed to avoid falling into deflation. However, this positive economic cycle has halted
temporarily since last spring due to a new shock that is putting strong
COVID-19,
downward pressure on economic activity. I will now talk about the corporate and household
sectors, first by looking at the current situation of income and spending and then the outlook
for each sector.
B. Current Situation of the Corporate and Household Sectors
In the corporate sector, profits which are firms' income have improved on the whole,
-- --
although weakness has been seen in some industries such as services (Chart 3).
face-to-face
The Financial Statements Statistics of Corporations by Industry, Quarterly (FSSC) show
that current profits for all industries and enterprises have already exceeded the
level for the quarter of 2021. This is because Japan's exports
pre-pandemic January-March
and production have increased steadily as the global economy has recovered on the whole,
albeit with unevenness. In the United States and Europe, public health measures have been
lifted in stages on the back of progress with vaccinations, and therefore a recovery in
economic activity has become evident, including for services consumption, which had been
constrained. This recovery in the U.S. and European economies together with the Chinese
--
economy's recovery, which has happened ahead of theirs has had positive effects on the
--
global economy through trade. Under these circumstances, business fixed investment
--
which is firms' spending has picked up in Japan, led by machinery investment by the
--
manufacturing industry. Business fixed investment plans in the Bank's Tankan
(Short-Term
Economic Survey of Enterprises in Japan) show that investment is expected to see a solid
increase for fiscal 2021. These factors suggest that, in the corporate sector, a virtuous cycle
from profits to business fixed investment has resumed, triggered by an increase in external
demand on the back of a recovery in overseas economies.
Turning to the household sector, the employment and income situation has remained weak,
although significant deterioration has been avoided, partly owing to policy support (Chart 4).
The number of employed persons declined due to the impact of mainly for
COVID-19,
employees in the services sector, and has remained at a relatively
non-regular face-to-face
low level to date. The unemployment rate has been at around 3 percent recently, which is
somewhat higher than the level. The unemployment rate that takes into
pre-pandemic
account "employed persons not at work" has been 6 percent, and labor underutilization
indicator 4 (LU4), which is the unemployment rate that also includes potential labor force,
has been 7.3 percent.3 Turning to wages, statistical features warrant attention. Wages in the
Monthly Labour Survey are shown as an average and thus are susceptible to changes in
composition of employment status. Some point out that real wages have not risen since the
introduction of QQE. To accurately grasp the actual situation regarding wages, however, it
is necessary to consider the compositional effects. For example, when the economy recovers,
workers who have been unemployed will return to the labor market, and thus the
low-wage
average wages will be pushed down.4 Apparently, the rate of change in total
year-on-year
cash earnings per employee had been sluggish even when the economy was recovering.
However, the rate of change has been positive of late. This is attributable to a rebound from
the decline seen last year, a fall in the share of employees, whose wage levels are
part-time
low, and rising wages in the medical, healthcare, and welfare services industry, which faces
a severe labor shortage. In addition, the rate of increase in scheduled cash
year-on-year
earnings of employees, which are less susceptible to changes in composition of
full-time
employment status, has expanded recently. As a result, employee income, obtained by
multiplying the number of employees by total cash earnings, has turned to a lately
pick-up
(Chart 5). Nevertheless, private consumption has been stagnant due to strong downward
pressure stemming from the impact of In particular, consumption of services,
COVID-19.
which includes eating and drinking as well as accommodations, has continued to be well
below the level due to the resurgence of and the resultant
pre-pandemic COVID-19
enactment of public health measures that has been having prolonged effects. In sum,
3
For the differences between these unemployment rates, see the "detailed tabulation" in the Labour
Force Survey by the Statistics Bureau of Japan.
4
To be more precise, changes in the employment status and working hours need to be taken into
consideration when calculating real wages. The Basic Survey on Wage Structure distinguishes
regular employees from part-time workers, such as non-regular employees. Based on this, real
hourly wages -- a term closer to real wages per employee -- are calculated. The estimation shows
that real wages for regular employees hired for an indefinite period rose by 4.5 percent from 2012 to
2019, and those for non-regular employees (among part-time workers) increased by 8 percent during
the same period. For details, see Iwata, K., "Nihon-gata kakusa shakai" kara no dakkyaku (Tokyo:
Kobunsha Shinsho, 2021), pp. 192-3. That said, the Basic Survey on Wage Structure is released only
once a year and thus is too infrequent to properly track developments in wages in real time.
uncertainties surrounding are still strongly constraining consumption activity,
COVID-19
and a virtuous cycle from income to spending therefore is not yet seen in the household
sector.
C. Key in Forecasting the Outlook
What is most important in terms of the outlook is that the degree of uncertainty over
constraining economic activity decreases on the back of, for example, further
COVID-19
progress with vaccinations, so that private consumption will no longer be sluggish. We
cannot be optimistic about developments in domestic and overseas economies because the
number of variant cases has kept increasing globally; however, as the impact of
COVID-19
almost subsides, the virtuous cycle is expected to be seen not only in the corporate sector
but also in the household sector. Furthermore, key to recovery in the overall economy
gaining more strength is developments in "standby" funds, which are saved for future use,
in each of the household and corporate sectors.
"Standby" Funds in the Two Sectors
Let me explain standby funds in the household sector (Chart 6). Since the
COVID-19
pandemic, funds on hand have accumulated significantly in the household sector.5 This is
because savings have increased due to the loss of consumption opportunities which
--
mainly reflects restrictions on going out and to uncertainties over the future, and because
--
subsidies have been provided under the economic measures. As constraints stemming from
wane and uncertainties decline, demand is likely to materialize, mainly
COVID-19 pent-up
in services, which has been restrained thus far, and then private consumption is
face-to-face
expected to recover. Given that and travel have been restricted under the
dining-out
pandemic for a long time, the size of their demand is expected to become
pent-up
significant. Standby funds that have accumulated in the household sector are also projected
to support the materialization of this demand.
Standby funds also have been accumulating recently in the corporate sector, although not to
as remarkable a level as seen in the household sector. From the deflationary period, since
Japanese firms tended to constrain business fixed investment relative to their amount of
profits, savings clearly kept exceeding investment for a long period. This tendency of
having excess savings in the corporate sector was not evident after the introduction of QQE.
However, it has intensified again since the pandemic, partly due to growing
COVID-19
uncertainties, including those over financial positions, and thus funds on hand have been
accumulating. Attention is paid to whether the withdrawal of standby funds will encourage
an increase in business fixed investment as the impact of wanes and
COVID-19
uncertainties decline.
Two "Expectations"
In order for standby funds to be actually used, thereby leading to an increase in propensity
to spend, it is important for firms and households to have a positive outlook for economic
activity and prices (Chart 7). In this regard, the results of the Annual Survey of Corporate
Behavior show that listed firms' growth expectations do not seem to have decreased
remarkably even after experiencing a significant negative shock to economic activity
brought about by Such steady expectations at present are clearly different
COVID-19.6
from those at the time of the Global Financial Crisis (GFC), when they decreased
considerably. This seems mainly because, in the face of the current worldwide pandemic
crisis, governments and central banks around the world, including Japan, have made
extremely prompt fiscal and monetary policy responses on an unprecedented scale (Chart 8).
In fact, these timely policy responses have ensured the flow of funds to firms and
households and have supported firms powerfully to sustain their businesses and
employment.
In addition to growth expectations, developments in inflation expectations are extremely
important (Chart 7). If households or firms expect that prices will decline in the future, their
incentives to postpone consumption or investment will increase and a virtuous cycle from
income to spending will not operate. Various indicators for inflation expectations
temporarily weakened somewhat after the outbreak of COVID-19, partly due to a
significant decline in crude oil prices, but they recently have moved out of that phase, being
more or less unchanged. Some indicators even show a partly reflecting the effects
pick-up,
of the recent rise in international commodity prices. That said, further recovery in growth
and inflation expectations of firms and households is necessary to achieve the price stability
target of 2 percent. The Bank will closely examine whether this recovery can intensify the
virtuous cycle in the overall economy.
D. Price Developments
Let me touch on price developments before moving on to the next topic (Chart 9). The
rebasing of the consumer price index (CPI), which is conducted every five years, took place
last month, and the rates of change since this spring were revised downward
year-on-year
by about 0.7 percentage points. This is mainly because a reduction in mobile phone charges
made a further negative contribution with the rebasing.7 Temporary factors such as a
change in price plans for mobile phone charges and large fluctuations in energy prices
should be excluded to capture actual developments in prices. When excluding these factors,
the rebased CPI has been marginally positive. This is another example of difficulties in
interpreting economic indicators, which I mentioned at the outset, and thus it is necessary to
carefully examine relevant data, including the underlying factors behind developments in
price indicators.
7
Given the rebasing, the year-on-year rates of change in the CPI (all items less fresh food) were
revised downward from minus 0.4 percent to minus 0.5 percent for January through March 2021 and
from 0.1 percent to minus 0.6 percent for April through June. The negative contribution of mobile
phone charges to the rates of change in the CPI for April through June expanded from about minus
0.5 percentage points to about minus 1.1 percentage points. This reflects a rise in weight of mobile
phone charges in the CPI, a resetting of the index level of such charges, and revision to the model
formula used for calculating them.
II. Challenges for Central Banks Today
A. Actions on Climate Change
The situation surrounding central banks continues to change. In July, the Bank released its
strategy on climate change (Chart 10).8 I would like to explain the thinking behind this
strategy. In recent years, there has been growing interest in the issue of climate change.9
Various central banks, together with financial regulatory and supervisory authorities,
formed an organization called the Network of Central Banks and Supervisors for Greening
the Financial System (NGFS) in December 2017, which the Bank of Japan joined in
November 2019.10 In addition, central banks such as the Bank of England (BOE) and the
European Central Bank (ECB) have begun to take policy actions to address climate
change.11
Essentially, climate change can be regarded as a global market failure. Greenhouse gases
are emitted as a result of economic activity. If they cause climate change, economic activity
results in so-called negative externalities, which may bring about excessive greenhouse gas
emissions. When market failures, including negative externalities, occur, public institutions
such as governments may be in a position to make responses.12
8
Details of the Bank's efforts to address climate change can be found at
https://www.boj.or.jp/en/about/climate/index.htm/.
9
According to the Peoples' Climate Vote, a survey of 1.22 million people in 50 countries conducted
by the United Nations Development Programme (UNDP) and Oxford University, 64 percent of
respondents considered climate change to be a global emergency. The percentage was higher in
small island developing states (74 percent) and high-income countries (72 percent), while it was
lower in middle-income countries (62 percent) and least developed countries (58 percent). The
percentage in Japan was 79 percent, the highest after the 81 percent both in the United Kingdom and
Italy. For details, see https://www.undp.org/publications/peoples-climate-vote.
10
For details on the NGFS, see https://www.ngfs.net/en.
11
Details of the responses to climate change by the BOE can be found on its web site at
https://www.bankofengland.co.uk/climate-change and the responses by the ECB on its web site at
https://www.ecb.europa.eu/ecb/climate/html/index.en.html.
12
To be more precise, the correction of market failures does not necessarily require the involvement
of government. When the Coase theorem in economics holds, it is theoretically possible to ensure
through voluntary negotiations among parties that negative externalities are internalized. However, a
prerequisite is that the cost of negotiation is low, and therefore this would not work as a response to
climate change, which involves a myriad of entities.
However, whether and how central banks should address climate change is controversial,
even among economists.13
Issues of debate include the following. First, there are extremely high uncertainties over the
mechanism of climate change and its impact.14 There are two types of risks associated with
climate change: physical risks and transition risks. Physical risks refer to an increase in
natural disasters such as floods caused by climate change. Transition risks emerge as a
result of complying with environmental regulations and changing industrial structures to
reduce greenhouse gas emissions. As for the former risks, the recent flood damage around
the world caused by heavy rains comes to mind. The torrential rains in Hiroshima
Prefecture in July 2018 and this August also are fresh in our memories, and many have been
suffering from them. Various scientists are carrying out research on climate change from the
physical science basis and discussions are still underway.15 While the number of natural
disasters appears to be increasing worldwide, the number of deaths related to natural
disasters has been decreasing (Chart 11).16 On the other hand, there is the "risk of doing
13
For example, some point to the risk of central banks doing nothing about climate change and urge
them to be involved in terms of financial regulation. Eichengreen, B., "New-Model Central Banks,"
Project Syndicate, February 9, 2021, https://www.project-syndicate.org/commentary/central
-banks-have-tools-for-climate-change-and-inequality-by-barry-eichengreen-2021-02. Others are
more skeptical about central banks' involvement. Blanchard, O., "Looking Forward: Monetary
Policy Post-Covid" in Monetary Policy and Central Banking in the Covid Era, eds. English, B.,
Forbes, K., and Ubide, A. (London: CEPR Press, 2021), pp. 417-24.
14
For various uncertainties regarding climate change and the policy responses, see Pindyck, R. S.,
"What We Know and Don't Know about Climate Change, and Implications for Policy,"
Environmental and Energy Policy and the Economy, vol. 2 (2021): pp. 4-43.
15
Scientific knowledge on climate change is regularly updated. In August, the Intergovernmental
Panel on Climate Change (IPCC) released Climate Change 2021: The Physical Science Basis, the
Working Group I contribution to the Sixth Assessment Report. In this report, the assessment has
been updated, stating it is likely that the global proportion of major (Category 3-5) tropical cyclone
occurrences has increased over the last four decades and that this cannot be explained by internal
variability alone; in other words, it likely is caused by human activities. That said, the assessed level
of confidence is low for long-term trends in the frequency of all-category tropical cyclones
(https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_SPM.pdf).
16
The increase in the number of natural disasters since the 1970s may be due to improvement in the
accuracy of statistics. Inui, T., "Shizen saigai to keizai seichō," Keizai Seminā, no. 706
(February/March 2019): pp. 22-5.
nothing." If we do not take action now, significant negative effects may become evident or
increase 20 or 30 years later. This is called the "tragedy of the horizon."17
The second issue is whether central bank actions on climate change relate to their mandate.
Of course, the very existence of central banks is a product of history, and their mandate has
evolved over the years as they have responded to market failures.18 In the case of Japan, the
Bank's current mandate, as stipulated in the Bank of Japan Act, is to maintain price stability
and financial system stability. The purpose of maintaining price stability is to "contribute to
the sound development of the national economy," and climate change, in terms of associated
physical and transition risks, is likely to affect such development through prices and the
financial system. As such, central banks can address climate change within the scope of
their mandate, and this is not mission creep. However, even when they take action, it is
extremely important to appropriately cooperate and divide labor with their governments.19
The third issue concerns the specific tools that central banks have at their disposal. Central
banks are institutions that supply money and liquidity to the economy. The Bank's mandate
to stabilize prices and the financial system also derives from this purpose. The Bank has
two tools at its disposal: (1) monetary policy measures such as fund-provisioning and (2)
on-site examinations and off-site monitoring. The Bank's strategy on climate change
released this July clearly indicates that its actions will be taken mainly through these two
tools for the time being.
17
The term "tragedy of the horizon" became famous in the speech by the former governor of the
BOE. Carney, M., "Breaking the Tragedy of the Horizon: Climate Change and Financial Stability,"
speech given at Lloyd's of London, September 29, 2015,
https://www.bankofengland.co.uk/speech/2015/breaking-the-tragedy-of-the-horizon-climate-changeand-financial-stability.
18
For the history of central banks, see Bordo, M. D. and Siklos, P. L., "Central Banks: Evolution
and Innovation in Historical Perspective" in Sveriges Riksbank and the History of Central Banking,
eds. Edvinsson, R., Jacobson, T., and Waldenström, D. (Cambridge: Cambridge University Press,
2018), pp. 26-89.
19
Nordhaus, W., The Climate Casino: Risk, Uncertainty, and Economics for a Warming World (New
Haven and London: Yale University Press, 2013).
In light of uncertainties, further studies and research are needed. From the perspective of
accountability, the collection of data as well as analysis of and assessment on policy effects
are also required. In addition, since climate change is a global market failure, it should be
addressed at a global level. Thus, not only Japan's actions but also collaboration among
countries around the world is necessary (Chart 12).
B. Price Stability
The Bank addresses climate change with the aim of achieving price stability in the medium
to long run. That said, it also places high priority on achieving price stability in the short run
and on overcoming deflation.
Price stability is essential to achieving the economic virtuous cycle I mentioned earlier.
However, why is the price stability target set at 2 percent? There are three reasons: securing
policy room in order for interest rates not to stick to the lower bound, an upward bias in
price statistics, and a global standard of 2 percent. Let me elaborate a little on the third point.
In countries and regions that allow free capital movement under the floating exchange rate
system, an increasing number of central banks has adopted inflation targeting recently. If
monetary policy is conducted autonomously in places with free capital mobility, foreign
exchange rates will fluctuate (Chart 13). However, if central banks around the world aim at
achieving the same target inflation rate, nominal foreign exchange rates will eventually
become less volatile.20 Either a review or assessment of the monetary policy frameworks
20
With regard to historical significance of inflation targeting in the global financial system, see
Rose, A. K., "A Stable International Monetary System Emerges: Inflation Targeting Is Bretton
Woods, Reversed," Journal of International Money and Finance, vol. 26, issue 5 (September 2007):
pp. 663-81.
The following paper focuses on a recent decline in volatility in foreign exchange rates.
Ilzetzki, E., Reinhart, C. M., and Rogoff, K. S., "Will the Secular Decline in Exchange Rate and
Inflation Volatility Survive COVID-19?" NBER Working Paper, no. 28108, 2020.
In addition, regarding analysis on the foreign exchange rate regime with a focus on the
relative size of balance sheets of the Federal Reserve and the Bank, see Sakurai, M. and Kimata, T.,
"An Essay on Japan's Monetary Policy Experience and Lessons," November 6, 2020,
https://www.boj.or.jp/en/announcements/press/koen_2020/data/ko201106a.pdf.
was conducted by the Federal Reserve in August 2020, by the Bank in March 2021, and by
the ECB in July 2021. As a result, they reconfirmed or strengthened the commitment toward
achieving the 2 percent target, and this has further encouraged the convergence of their
policy frameworks. In addition, all of these central banks have continued with the low
interest rate policy, and the yield differentials have been stable among these countries and
regions. In reflection of these developments, volatility in exchange rates among the U.S.
dollar, the euro, and the yen has decreased in recent years (Chart 14). Japan's economy has
managed to avoid falling into deflation despite being affected by and this may
COVID-19,
be because the Bank has firmly maintained an active stance on monetary easing under the 2
percent target. This also implies, however, that changing the current monetary policy
framework should be avoided because it might lead to volatile foreign exchange markets.
There used to be a prevailing view that inflation targeting is for lowering inflation rates and
not for overcoming deflation. However, in fact, central banks in the 2000s that had adopted
inflation targeting conducted monetary easing measures when the actual inflation rates fell
below the target rates. In addition, reflecting a decline in the actual inflation rates due to the
impact of the Federal Reserve adopted average inflation targeting and the ECB
COVID-19,
redefined its 2 percent inflation target as "symmetric." The Bank introduced the
commitment in September 2016 and has been conducting monetary
inflation-overshooting
policy under it since. As can be seen from these responses, inflation targeting has been used
to raise inflation rates as well.
It should be noted that, even though the monetary policy frameworks of central banks
around the world are converging, appropriate policy measures are not the same everywhere.
For example, even if the inflation rate in the United States exceeds the 2 percent target and
the Federal Reserve starts to tighten monetary policy given the achievement of average
inflation targeting, this does not mean that the Bank will adjust its monetary policy. The
Bank is focused on achieving its price stability target of 2 percent and maintaining the
inflation rate at that level in a stable manner in Japan.
Reflecting rises in energy and commodity prices, Japan's CPI for all items excluding fresh
food, or the "core CPI," also has seen an increase in its rate of change recently. However,
the core CPI is not the only price indicator the Bank looks at in deciding its policy measures,
and the rises in energy and commodity prices may even be transitory. In addition, it is
necessary to pay attention to the fact that, with such price rises, the terms of trade
deteriorate and income flows out of Japan. If this happens, it will become desirable to
expand the macroeconomic policy with a view to maintaining income. Since such policy
may further push up the inflation rate, we should pay attention to developments in inflation
expectations. In any event, we have learned from the history of the Great Inflation, which
occurred from the second half of the 1960s, that unless domestic demand expands
continuously, inflation will not be sustained just by factors.21 Furthermore, in
cost-push
Japan, there is still a long way to go to achieve the price stability target of 2 percent. As has
been confirmed in the assessment conducted in March 2021, the Bank's
commitment incorporates the strategy of making up for the past
inflation-overshooting
deflation. This means the Bank will allow the inflation rate to overshoot the target of 2
percent even if it temporarily reaches that level. It is essential not to tighten the current
accommodative financial conditions prematurely by only looking at developments in the
core CPI in the short run.
C. Financial System Stability
The Bank's other mandate is to ensure financial system stability. The Policy Board has been
receiving reports and explanations from time to time regarding business conditions of
Japanese financial institutions and risk assessment of the financial system. In addition,
starting from this April, the staff members of the Financial System and Bank Examination
Department have been explaining developments in the financial system at the MPMs when
the Outlook Report is decided, which is four times a year. The underlying idea is that
financial system stability is essential for achieving price stability. That said, price stability
and financial system stability are interdependent; for instance, under deflation where prices
of goods, services, and assets fall, investment is constrained due to a rise in the real interest
rate, firms' real debt burden increases, and credit costs of financial institutions rise.22 This
suggests that price stability contributes to financial system stability.
How to interpret warning signals from the financial system and reflect what we learn from
them in monetary policy is an ongoing challenge. To understand the current situation of the
financial system from various indicators in the Financial System Report, such as the heat
map and (GaR), it is necessary to also take into account other information
GDP-at-risk
regarding economic and financial conditions available at that time.23 For example, in the
Financial System Report released this April, the heat map showed that four Financial
Activity Indexes (FAIXs) were "red," which signals an upward devia