September 23, 2020
Bank of Japan
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Osaka
(via webcast)
KURODA Haruhiko
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 Kansai region, which is taking place online this year
due to the continued impact of the novel coronavirus (COVID-19). I would like to take this
chance to express my sincerest gratitude for your cooperation with the various activities of
the Bank of Japan's branches in Osaka, Kobe, and Kyoto.
At the outset, I would like to talk about the Bank's view on economic developments at home
and abroad that are affected by COVID-19 and then explain the thinking behind the recent
conduct of monetary policy.
I. Economic Developments at Home and Abroad
Let me start by talking about economic developments at home and abroad. In response to
the global spread of COVID-19 from the turn of this year, many countries and regions have
conducted strict public health measures since early spring, such as restrictions on going
outside and suspension of business and production activities. As a result, the global
economy became depressed significantly in the first half of the year (Chart 1). The
International Monetary Fund (IMF) projects that the global economic growth rate for 2020
will be minus 4.9 percent, which exceeds the negative figure registered at the time of the
Global Financial Crisis. The spread of COVID-19 has not yet subsided globally, and the
global economy has remained in a severe situation. That said, with many countries and
regions resuming economic activities gradually while containing the spread, the global
economy has started to pick up from a state of significant depression. The Global PMI has
picked up from the bottom hit in April and recently has been above 50, which is the
borderline between improvement and deterioration in business conditions perceived by
firms. The IMF forecasts that the global economy will recover from the second half of 2020
and the growth rate will be positive in 2021. However, it assumes that the pace of recovery
will be only moderate with preventive measures against COVID-19 continuing to be taken.
Japan's economy has shown similar developments to those of the global economy.
Specifically, the economy seems to have started to pick up with economic activity resuming
gradually, although it has remained in a severe situation (Chart 2). Due to the impact of
COVID-19, the real GDP growth rate for the April-June quarter registered significant
negative growth, mainly reflecting declines in private consumption and exports, and
downward pressure was put on the employment and income situation as well. A wide range
of industries have been affected by COVID-19; in particular, those such as eating, drinking,
and accommodations, as well as services for individuals have faced a significant decline in
demand. That said, after the state of emergency was lifted, economic activity has been
resuming gradually. As for private consumption, that of face-to-face services has remained
at a low level, but goods consumption such as sales of household electrical appliances has
picked up, mainly on the back of businesses reopening and income support measures.
Exports, reflecting resumption in economic activities abroad, have turned to a pick-up,
albeit at a low level. While there are extremely high uncertainties, the Bank projects as a
baseline scenario that, as the impact of COVID-19 wanes, the economy will follow an
improving trend. However, the pace of improvement is expected to be only moderate
because precautionary efforts made voluntarily by firms and households will continue to act
as a force constraining economic activity while vigilance against COVID-19 is maintained.
Let me move on to price developments in Japan (Chart 3). The year-on-year rate of change
in the consumer price index (CPI) is likely to be negative for the time being, mainly
affected by COVID-19, the past decline in crude oil prices, and discounts on
accommodation fees through the "Go To Travel" campaign. That said, at least for now,
firms' price cuts that aim at stimulating demand do not seem to be observed widely. The
share of price-increasing items minus the share of price-decreasing items has continued to
be a net "increase." Under these circumstances, the Bank projects as a baseline scenario that,
along with economic improvement, the year-on-year rate of change in the CPI will turn
positive and then increase gradually.
However, the aforementioned outlook for economic activity and prices is extremely unclear,
and risks are skewed to the downside. Above all, the consequences of COVID-19 and their
impact on domestic and overseas economies entail extremely high uncertainties. In addition,
attention should be paid to whether the COVID-19 shock will lead to a decline in firms' and
households' growth expectations, thereby making their spending attitudes become cautious.
Thus far, growth expectations do not seem to have declined significantly, as seen in firms'
stance of continuing to undertake much of the necessary investment for growth areas and in
positive changes such as the use of information and communication technology (ICT). That
said, it is necessary to closely monitor future developments.
II. The Bank's Conduct of Monetary Policy
COVID-19 has had a large impact on not only domestic and overseas economies but also
the financial side. With investors' risk sentiment deteriorating globally from late February,
financial markets rapidly became unstable. Firms' financial positions weakened worldwide,
reflecting a decline in sales that was due to a significant depression in the global economy.
Governments and central banks around the world have responded swiftly on a large scale to
the economic and financial shock brought about by COVID-19. Among these efforts, the
central banks' responses have two things in common. One is support for financing, mainly
of firms, such as through funds-supplying measures to support lending as well as purchases
of CP and corporate bonds, and the other is ensuring stability in financial markets through
large-scale provision of liquidity, mainly by conducting asset purchases. In this regard, the
Bank has enhanced monetary easing since March and implemented the following three
measures (Chart 4).
First, the Bank introduced the Special Program to Support Financing in Response to the
Novel Coronavirus (COVID-19) in order to support financing, mainly of firms. The total
size of this program will be more than 130 trillion yen. Specifically, this program consists of
(1) purchases of CP and corporate bonds with the upper limit of about 20 trillion yen and
(2) the Special Funds-Supplying Operations to Facilitate Financing in Response to the
Novel Coronavirus (COVID-19), which will be about 110 trillion yen at maximum.
Through this special operation, the Bank provides funds on favorable terms to financial
institutions that make loans in response to COVID-19.
Second, to ensure stability in financial markets, the Bank has provided ample yen and
foreign currency funds. As for the yen funds, under yield curve control, the Bank decided to
purchase a necessary amount of Japanese government bonds (JGBs) without setting an
upper limit with a view to stabilizing the yield curve at a low level. Regarding foreign
currency funds, the Bank has provided ample U.S. dollar funds through the strengthened
U.S. dollar funds-supplying operations.
Third, with a view to lowering the risk premia in asset markets, the Bank has actively
purchased exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs),
thereby preventing firms' and households' sentiment from deteriorating, mainly through
volatility in asset markets, and supporting positive economic activity.
These measures have had positive effects. Although financial markets are still nervous due
to vigilance against COVID-19, tension has eased recently. Corporate financing has
continued to be under stress, but the environment for external funding has remained
accommodative (Chart 5). Funding costs have been at low levels, and both the year-on-year
rates of increase in the amount outstanding of bank lending and in the aggregate amount
outstanding of CP and corporate bonds have remained high. This is a big difference from
the time of the Global Financial Crisis; that is, downward pressure from the financial side
on the real economy intensified during the Global Financial Crisis, whereas in the current
crisis, with stability of the financial system being maintained on the whole, the environment
for external funding has remained accommodative, also supported by the policy effects. It is
expected that stability of the financial system will not be hampered significantly and the
economy will continue to be supported from the financial side. That said, the financial
system could be affected when the challenge for economic entities shifts from a liquidity
problem to a solvency one. Thus, future developments warrant close attention.
As with governments and central banks around the world, the Japanese government and the
Bank have made swift responses to the current crisis on a large scale. Specifically, the
government has conducted economic measures with a project size of 234 trillion yen,
significantly exceeding the scale of measures taken during the Global Financial Crisis. In
order to address an emergency situation such as the current one, cooperation between the
government and central bank is effective in terms of policy conduct. Let me elaborate on
this through two points.
The first is about support for financing, mainly of firms, at a time of crisis. In this regard,
the globally shared understanding is that the central bank provides liquidity and the
government provides solvency support. This time in Japan, in line with this understanding,
the government has provided credit guarantees on loans made by private financial
institutions to small and medium-sized firms while the Bank has provided funds on
favorable terms to those institutions through the Special Funds-Supplying Operations to
Facilitate Financing in Response to the Novel Coronavirus (COVID-19). This system has
been working well.
The second point is about the relation between fiscal and monetary policies. Reflecting the
unprecedented large-scale economic measures conducted by the Japanese government to
address COVID-19, the issuance of JGBs has increased. Meanwhile, the Bank has
maintained interest rates at low levels by actively purchasing JGBs. These active purchases
are based on the need to conduct monetary policy, and recently, given the impact of
COVID-19, the aim of such purchases is to maintain stability in the bond market. Through
this, the Bank also intends to support the economy and fulfill its role of achieving price
stability. In this manner, a policy mix of fiscal and monetary policies can be achieved
effectively while the government and the Bank fulfill their respective roles.
Thus far, I have explained the Bank's monetary policy responses to the current crisis. The
Bank will continue to provide support for financing, mainly of firms, and maintain stability
in financial markets while taking into account developments in the regional economy.
Before ending my speech, I would like to touch on the challenges of monetary policy
conduct from a somewhat long-term perspective. Compared with the period prior to the
Global Financial Crisis, there is a higher probability that the policy interest rates in
advanced economies will fall to the lower bound amid the situation of a declining trend in
the natural rate of interest. Against this background, these economies have faced the
common challenges of how to enhance the effectiveness and credibility of monetary policy.
As a result of a review of the framework of monetary policy, the Federal Reserve
announced last month that it would seek to achieve inflation that averages 2 percent over
time. The Federal Reserve also made clear that it would aim to achieve inflation moderately
above 2 percent for some time following periods when inflation has been running
persistently below 2 percent.
The Bank has taken various actions to overcome such challenges. In September 2016, in
particular, it adopted the framework of "Quantitative and Qualitative Monetary Easing
(QQE) with Yield Curve Control." One of the components is the "inflation-overshooting
commitment" in which the Bank commits itself to expanding the monetary base until the
year-on-year rate of increase in the observed CPI exceeds the price stability target of 2
percent and stays above the target in a stable manner. Under this framework, it aims to
attain a situation where the inflation rate is 2 percent on average over the business cycle.
Thus, the Bank views the Federal Reserve's thinking that underlies its latest decision as
consistent with that of the Bank on the monetary policy conduct to date.
The Bank recognizes that it remains necessary to maintain highly accommodative financial
conditions, aiming to achieve the price stability target as well as responding to COVID-19.
In particular, since the economic and financial impact of COVID-19 is highly uncertain, the
Bank, for the time being, will closely monitor this impact and not hesitate to take additional
easing measures if necessary.
Thank you very much for your attention.
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Osaka
(via webcast)
September 23, 2020
KURODA Haruhiko
Governor of the Bank of Japan
Introduction
I. Economic Developments at Home and Abroad
II. The Bank's Conduct of Monetary Policy
Chart 1
I. Economic Developments
Global Economy
Global Growth Rate (IMF, June 2020) Global PMI
y/y % chg. 2021: s.a., DI
60
6
+5.4%
5
55
4
50
3
2
2019:
Average from 1980 45
+2.9%
1 through 2019:
+3.5%
40
0
-1
35
-2
-3 30
2020:
-4.9%
-4
Manufacturing Services
25
-5
IMF forecasts
-6 20
CY 07 08 09 10 11 12 13 14 15 16 17 18 19 20
CY 00 02 04 06 08 10 12 14 16 18 20
Note: In the right-hand chart, figures for manufacturing are the "J.P.Morgan Global Manufacturing PMI" and those for services are the "J.P.Morgan Global Services Business Activity Index."
Sources: IMF; IHS Markit (© and database right IHS Markit Ltd 2020. All rights reserved.).
1
Chart 2
I. Economic Developments
Private Consumption and Exports
Consumption Activity Index (CAI, Real) Real Exports
s.a., CY 2011=100
s.a., CY 2015=100
110
120
115
105
110
100
105
95
100
CAI (travel balance adjusted)
95
Real exports
90
CAI
90
85
85
80 80
Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan. Jan.
16 17 18
19 20
Chart 3
I. Economic Developments
Consumer Prices
Consumer Price Index (CPI) Diffusion Index of Price Changes
y/y % chg.
% points
3
60
CPI (less fresh food)
2
CPI (less fresh food and energy)
40
1
20
0
0
-1
-20
-2 -40
-60
-3
07 09 11 13 15 17 19
CY 07 09 11 13 15 17 19 CY
Notes: 1. In the left-hand chart, figures exclude the effects of the consumption tax hike in April 2014.
2. As for the right-hand chart, figures are defined as the share of increasing items in the CPI (all items less fresh food) minus the share of decreasing items. The share of
increasing/decreasing items is the share of items for which price indices increased/decreased from a year earlier.
Sources: Ministry of Internal Affairs and Communications; Bank of Japan. 3
Chart 4
II. The Bank's Conduct of Monetary Policy
The Bank's Measures in Response to COVID-19
Supporting Corporate Financing
Special Program to Support Financing in Response to COVID-19:
total size of about 130 tril. yen + α
Purchases of CP and corporate bonds: amount outstanding of about 20 tril. yen at maximum (previous
amount outstanding of about 5 tril. yen)
Special Funds-Supplying Operations to Facilitate Financing in Response to COVID-19: about 110 tril. yen
Stabilizing Financial Markets
Ample and Flexible Provision of Yen and Foreign Currency Funds
Further active purchases of JGBs and T-Bills: unlimited
Enhancement of the U.S. Dollar Funds-Supplying Operations: unlimited
Active Purchases of ETFs and J-REITs
ETFs: annual pace of about 6 tril. yen
→ annual pace with the upper limit of about 12 tril. yen (for the time being)
J-REITs: annual pace of about 90 bil. yen
→ annual pace with the upper limit of about 180 bil. yen (for the time being)
Chart 5
II. The Bank's Conduct of Monetary Policy
Financial Conditions
Amount Outstanding of Bank Lending, CP,
Funding Costs
and Corporate Bonds
y/y % chg.
%
16
2.0
14
Bank lending rates (short-term)
1.8
Lending by domestic
Bank lending rates (long-term)
12
commercial banks
1.6
CP (3-month)
10
CP and corporate bonds
Corporate bonds (rated AA)
1.4
8
1.2
6
4
1.0
2
0.8
0
0.6
-2
0.4
-4
0.2
-6
0.0 -8
CY 09 10 11 12 13 14 15 16 17 18 19 20 CY 09 10 11 12 13 14 15 16 17 18 19 20
Notes: 1. In the left-hand chart, figures for issuance yields for CP up to September 2009 are the averages for CP (3-month, rated a-1 or higher). Those from October 2009 are the averages for CP
(3-month, rated a-1). Figures for issuance yields for corporate bonds are the averages for domestically issued bonds launched on a particular date. Bonds issued by banks and securities
companies, etc., are excluded. Figures for bank lending rates and issuance yields for corporate bonds show 6-month backward moving averages.
2. In the right-hand chart, figures for lending by domestic commercial banks are monthly averages. Figures for CP and corporate bonds are those at the end of period. Lending by domestic
commercial banks includes loans to firms, individuals, and local governments.
Sources: Bloomberg; Bank of Japan; Japan Securities Depository Center; Capital Eye; I-N Information Systems. 5