March 6 , 2019
Bank of Japan
Economic Activity, Prices,
and Monetary Policy in Japan
Speech at a Meeting with Business Leaders in Yamanashi
Yutaka Harada
Member of the Policy Board
Introduction
Thank you for giving me this opportunity to exchange views with you and for having taken
the time to be here despite your busy schedules. It is indeed a great honor to be here today.
Please allow me to express my gratitude for your great cooperation with the business
operations of the Bank of Japan, particularly of the Kofu Branch.
The Bank introduced quantitative and qualitative monetary easing -- or QQE for short -- in
April 2013 with the aim of achieving the inflation target of 2 percent, and since then has
strengthened the QQE framework.
Today, I first would like to explain the achievements thus far of the Bank's monetary easing
measures, excluding those regarding prices, and then describe recent developments in the
economy and prices.
I. The Achievements of Monetary Easing
Improvements in Employment
The first thing that should be mentioned as an achievement of monetary policy is the
improvement in employment.1 Chart 1 shows the number of regular and non-regular
employees. As can be seen, at the start of QQE, it was primarily non-regular employment
that increased. However, since around the beginning of 2015, regular employment also has
expanded. Moreover, the share of non-regular employees (non-regular employees divided
by all employees excluding executives), which had been rising, also has leveled off.
Chart 1 Employment
Introduction of QQE
mil. persons
%
45 45
40 40
35 35
30 30
Before QQE After QQE
Regular employees -0.6% (annualized) +1.1%
25 25
Non-regular employees +1.5% (annualized) +2.4%
20 20
15 15
10 10
5 5
0 0
86 88 90 92 94 96 98 99 01
1984 2000
02/Q2 02/Q4 03/Q2 03/Q4 04/Q2 04/Q4 05/Q2 05/Q4 06/Q2 06/Q4 07/Q2 07/Q4 08/Q2 08/Q4 09/Q2 09/Q4 10/Q2 10/Q4 11/Q2 11/Q4 12/Q2 12/Q4 13/Q2 13/Q4 14/Q2 14/Q4 15/Q2 15/Q4 16/Q2 16/Q4 17/Q2 17/Q4 18/Q2 18/Q4
Feb. Feb. Feb. Feb. Feb. Feb. Feb.
Aug. Aug.
Feb.
Aug.
Number of regular employees (both sexes)
Number of non-regular employees (both sexes)
Rate of non-regular employees (both sexes, right scale)
Note: Regular employees and non-regular employees exclude executives of companies and
corporations. The figures for "Before QQE" and "After QQE" show the annualized growth
rates of employees from 2008/Q1 to 2013/Q1 and those from 2013/Q1 to 2018/Q4,
respectively.
Source: Ministry of Internal Affairs and Communications, "Labour Force Survey."
Improvements in Employment of Women and the Elderly
Chart 2 shows that the employment of both women and the elderly (those aged 65 years and
over) has been growing. Nevertheless, despite women's entry into the labor market, most
women work part-time, and I am well aware of the criticism that there are few women in
top positions in Japan. According to the World Economic Forum's Global Gender Gap
Index (2018), which measures the degree of gender equality, Japan ranks only 110th among
149 countries. However, some progress is being made. As can be seen in Chart 2, the
number of women in regular employment has been increasing. Moreover, the proportion of
women who are non-regular employees, which had been rising, has remained flat since the
start of QQE. This means that the number of women gaining experience at work and
moving into managerial positions also should increase. In fact, the share of managerial
positions occupied by women has been on a rising trend.2
Chart 2 Employment of Women and the Elderly
mil. persons Introduction of QQE %
16 80
14 70
12 60
10 50
Before QQE After QQE
Non-regular employees (female) +1.2% (annualized) +2.6%
Regular employees (female) +0.2% (annualized) +2.0%
8 40
6 30
Before QQE After QQE
4 20
Non-regular employees(both sexes, aged 65 years and over) +5.7% (annualized) +12.1%
Regular employees (both sexes, aged 65 years and over) +3.7% (annualized) +6.9%
2 10
0 0
86 88 90 92 94 96 98 99 01
1984 2000
02/Q2 02/Q4 03/Q2 03/Q4 04/Q2 04/Q4 05/Q2 05/Q4 06/Q2 06/Q4 07/Q2 07/Q4 08/Q2 08/Q4 09/Q2 09/Q4 10/Q2 10/Q4 11/Q2 11/Q4 12/Q2 12/Q4 13/Q2 13/Q4 14/Q2 14/Q4 15/Q2 15/Q4 16/Q2 16/Q4 17/Q2 17/Q4 18/Q2 18/Q4
Feb. Feb. Feb. Feb. Feb. Feb. Feb.
Feb. Aug. Aug.
Aug.
Number of regular employees (both sexes, aged 65 years and over)
Number of non-regular employees (both sexes, aged 65 years and over)
Number of regular employees (female)
Number of non-regular employees (female)
Rate of non-regular employees (female, right scale)
Rate of non-regular employees (both sexes, aged 65 years and over, right scale)
Rate of non-regular employees (both sexes, aged 15-64 years, right scale)
Note: Regular employees and non-regular employees exclude executives of companies and
corporations. The figures for "Before QQE" and "After QQE" show the annualized growth
rates of employees from 2008/Q1 to 2013/Q1 and those from 2013/Q1 to 2018/Q4,
respectively.
Source: Ministry of Internal Affairs and Communications, "Labour Force Survey."
Moreover, Chart 2 also shows that employment of the elderly has been growing. However,
in the case of the elderly, the share of non-regular employees has been rising. The reason is
likely that many are hired as temporary or part-time workers after reaching retirement age.
Because Japan's population is aging, this means that it is unlikely that the share of
non-regular employees in employment as a whole will decrease. However, looking at
employees between 15 and 64 years of age, the share of non-regular employees has been
declining since around 2014.
While it is difficult for the elderly to obtain regular employment, the fact is that more and
more are gaining the opportunity to work. In September 2017, the government launched the
"Council for Designing a 100-Year Life Society," and in June 2018 it released the report
"[B]asic [D]esign for the Human Resources Development Revolution," calling for increased
employment of the elderly.3
At the same time, however, the proliferation of the notion of a "100-Year Life" may have
made people aware of the longevity risk again, which may have led to the rise in the savings
rate, or in other words, the decline in the consumption rate, which I will talk about later.
Decrease in Suicides
When unable to find a job in the face of a difficult employment situation, being under such
stress causes one to question their worth to society. Indeed, studies show that suicides
increase in tandem with a rise in the number of unemployed.4 Assuming that this is true,
suicides should decrease if the unemployment rate were to decline. Chart 3, which shows
the number of suicides and the unemployment rate, indicates that the two are linked: as the
unemployment rate rises, the number of suicides increases, and vice versa. While I do not
think that suicides are caused by economic problems alone, what is clear is that the number
of suicides per year has fallen by 7,000 or more since 2012 as a result of the upturn in the
economy and the decline in the unemployment rate.
Chart 3 Unemployment Rate and Suicides
persons
%
40,000 6
35,000
5
30,000
4
25,000
20,000 3
15,000
2
10,000
1
5,000
0 0
1980 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18
Number of suicides Unemployment rate (right scale)
Sources: National Police Agency, "Suicide Statistics"; Ministry of Internal Affairs and
Communications, "Labour Force Survey."
Slight Increase in the Birth Rate
I think that a small improvement in the birth rate also has been achieved. Chart 4 shows the
unemployment rate, the marriage rate, and the birth rate for the population of 20- to
39-year-olds. It is a well-known fact that the marriage rate and the birth rate are correlated,
as is more or less evident from the chart.
Chart 4 Rates of Unemployment, Marriage, and Birth
100 thous. persons (live births); persons (birth rate); cases (marriage rate) %
60 7
50 6
40 5
30 4
20 3
10 2
0 1
1968 71 74 77 80 83 86 89 92 95 98 01 04 07 10 13 16
Number of live births
Birth rate (per 1,000 population aged 20 to 39)
Marriage rate (per 1,000 population aged 20 to 39)
Unemployment rate (aged 20 to 39, right scale)
Note: For 1975 onward, the birth rate is calculated as the number of live births to mothers aged
20 to 39 divided by the population aged 20 to 39. For 1974 and earlier, the birth rate is
calculated as the total number of live births divided by the population aged 20 to 39. The
marriage rate is calculated as the total number of marriages divided by the population
aged 20 to 39.
Sources: Ministry of Internal Affairs and Communications, "Labour Force Survey"; Ministry
of Health, Labour and Welfare, "Vital Statistics."
Let us take a closer look at this. The birth rate per 1,000 population aged 20 to 39 (hereafter
birth rate), which previously had been on a declining trend, has been rising since 2005 along
with the decline in the unemployment rate.
The bar graph in the chart illustrates this trend in terms of live births per population
(hereafter live births). Note how, when comparing two age groups with the same birth rate,
the number of live births increases for the age group with a greater number of constituents.
Given that second-generation baby boomers (children of baby boomers born between 1947
and 1949) reached their average marriage age sometime between 1995 and 2000 or, if we
take the rise in the average marriage age into account, sometime between 2000 and 2005,
the number of live births subsequently would have increased had there been a reversal in the
birth rate around this time. There turned out to be no such increase, however. The reason is
that, during the approximate period from 1995 to 2005 and in the few years after the
outbreak of the global financial crisis in 2008, young people of this generation were not
able to find stable employment due to the so-called employment ice age, which led them to
5 , 6
think twice about marriage and having children. Put differently, had QQE been
introduced at an earlier stage, second-generation baby boomers would not have had to cope
with the repercussions of the employment ice age, likely resulting in an increase in the
number of live births from around 1995.
Improvement in Government Finances
An improvement in employment means that incomes increase. Firms hire people because
their profits are rising. When employment grows, both profits and wages increase. When
there is an increase in profits and wages -- that is, the income of the country as a whole --
the government's tax revenue also rises. Chart 5 shows the general government fiscal
balance (relative to GDP) and government debt (also relative to GDP). While Japan's fiscal
situation is severe, its deficit in fiscal 2017 shrank to 2.7 percent of GDP. Compared with a
deficit of 8.3 percent in fiscal 2012, this is an improvement of about 5.5 percentage points.
The reason is that the economy has been doing well and the government's tax revenue has
been increasing. The increase in tax revenue due to the consumption tax hike from 5 to 8
percent is said to amount to about 8 trillion yen (1.5 percent of GDP). While the remaining
improvement of 4.0 percentage points is partly attributable to the effects of a positive
turnaround in overseas economies, it owes in large part to the improvement in the economy
5
For details on the employment ice age, see Genda Yuji et. al, Shūshoku hyōgaki sedai no keizai
shakai e no eikyō to taisaku ni kansuru kenkyū iinkai hōkokusho, Research Institute for
Advancement of Living Standards, November 2016.
6
In his recent book, former Bank of Japan Governor Shirakawa argues that the immediate response
of many major Japanese firms to the large demand shock brought about by the bursting of the bubble
and the outbreak of the global financial crisis in 2008 was to reduce graduate recruitment and
increase non-regular employment. During this so-called employment ice age, the young bore the
brunt of the employment adjustment. University graduates entering the labor market during this time
-- the so-called second-generation baby boomers -- found it difficult to accumulate sufficient skills
as young workers, leading to lower income levels, which in turn has had a lasting social impact
including an increase in the rate of those who are unmarried and the consequent decrease in the
Chūō Ginkō
number of births (available only in Japanese). Shirakawa Masaaki, (Tokyo: Toyo Keizai,
2018), p. 112.
as a result of QQE. Moreover, the ratio of government debt to GDP also has declined
slightly from its peak of 239 percent in fiscal 2015.
Chart 5 Fiscal Balance and Debt of General Government Relative
to Nominal GDP
% %
0 300
-2 250
-4 200
-6 150
-8 100
-10 50
-12 0
FY 1994 96 98 00 02 04 06 08 10 12 14 16
Fiscal balance Government debt outstanding (right scale)
Source: Cabinet Office, "System of National Accounts."
Decline in Personal Income Inequality
Furthermore, income inequality has declined. Results of statistics show that income
inequality in terms of equivalized disposable income has declined.7,8 Meanwhile, Chart 6
7
See Statistics Bureau, Ministry of Internal Affairs and Communications, "Analytical [Results of]
Income Distribution," 2014 National Survey of Family Income and Expenditure (available only in
Japanese), October 2016.
8
Equivalized disposable income is obtained by adjusting the quotient of household disposable
income and the square root of the number of household members. In its international comparisons,
the Organisation for Economic Co-operation and Development (OECD) uses the Gini coefficient
(see footnote 11) and the relative poverty rate for each country calculated on the basis of equivalized
disposable income.
shows the trend in the relative poverty rate.9 As the chart shows, the relative poverty rate
has declined, regardless of whether we look at the overall rate, the child poverty rate, or the
poverty rate of single-parent households. Since most single-parent households are
single-mother households, the chart indicates that the poverty rate of single mothers has
declined from 62.0 percent in 2009 to 47.7 percent in 2014. While it is shocking that the
poverty rate for single mothers is close to 50 percent, I view the rate's decline to this extent
as a substantial achievement.10
Chart 6 Relative Poverty Rate
% %
13 70
12 60
11 50
10 40
9 30
8 20
7 10
1999 2004 2009 2014
Overall Children Single-parent households
Sources: Ministry of Internal Affairs and Communications, "2014 National Survey of Family
Income and Expenditure."
9
The relative poverty rate of a country is the proportion of its household members whose
equivalized disposable income falls below the poverty line (one-half the median equivalized
disposable income). Inequality has fallen from 2009 to 2014 in terms of the Gini coefficient for
equivalized disposable income. For details, see 2014 National Survey of Family Income and
Expenditure (available only in Japanese).
10
Similarly, the relative poverty rate, the child poverty rate, and the poverty rate of single
households with at least one child have all declined from 2012 to 2015. See Ministry of
working-age
Health, Labour and Welfare, Summary Report of Comprehensive Survey of Living Conditions 2016,
June 2017.
Decline in Regional Income Inequality
Regional income inequality also has been declining. The left panel of Chart 7 shows the
ratio of the average per capita prefectural income of the top five prefectures weighted by
population to that of the bottom five prefectures weighted by population (top five
prefectures divided by bottom five prefectures) and the Gini coefficient of prefectural
income.11 The chart seems to exhibit that, after dipping in fiscal 2010 following the
outbreak of the global financial crisis in 2008 (reflecting the decrease in income in
wealthier regions), inequality increased again; however, compared to fiscal 2012, the year
before the introduction of QQE, inequality appears to have decreased. In other words,
regional income inequality is falling. Moreover, as seen in the right panel of Chart 7,
income both in the top five and the bottom five prefectures is growing, which is why it
cannot be said that inequality has been falling because the top prefectures other than Tokyo
-- with the highest income level in Japan -- have become poorer. While I would not go so
far as to say that the decline in inequality is due solely to QQE, I think it can be said that the
decline is due to the benefits of the economic expansion extending to all regions. However,
it also is argued that the decline in regional inequality is not necessarily something to
celebrate. The reasoning for this is that Tokyo has fallen behind in the competition among
major global cities, as evidenced by the fact that the average per capita income in Tokyo
today is still lower than in fiscal 2007.
Chart 7 Regional Income Inequality Measured by Per Capita
Prefectural Income
thousand yen
0.15 11 6,000
5,500
0.14 10
5,000
4,500
0.13 9
4,000
3,500
0.12 8
3,000
2,500
0.11 7
2,000
0.10 6 1,500
FY 2006 08 10 12 14 FY 2006 08 10 12 14
Ranked highest Ranked 2nd highest
Gini coefficient
Ranked 3rd highest Ranked 4th highest
Ranked 5th highest Ranked 5th lowest
Top 5 prefectures / bottom 5
Ranked 4th lowest Ranked 3rd lowest
prefectures (right scale)
Ranked 2nd lowest Ranked lowest
Source: Cabinet Office, "System of Prefectural Accounts."
Japan, a More Open Country Today
Lastly, with the economy continuing to grow, Japan appears to be becoming more interested
in and open to foreign cultures, people, services, and products. Amid growing anti-free
trade sentiments in many advanced economies, Japan concluded the Comprehensive and
Progressive Agreement for Trans-Pacific Partnership (CPTPP, which came into effect in
December 2018) and the Japan-EU Economic Partnership Agreement (EPA, which came
into effect in February 2019). Japan is now a global standard bearer of free trade. Moreover,
with the amendment to the Immigration Control and Refugee Recognition Act in December
2018, Japan is seeking to attract overseas workers and improve their employment
conditions.
II. Recent Economic Developments
In my description of the achievements of monetary policy, I have focused so far on
developments other than short-term economic indicators. I would now like to talk about
recent economic developments.
Charts 8 and 9 provide an overview of key economic indicators. Almost all the indicators in
Chart 8 -- for production, investment, and exports -- have been improving. Some of these
were sluggish following the consumption tax hike in April 2014 and thereafter, particularly
in the period from the second half of 2014 to the first half of 2016, when global trade
volume was sluggish. However, there also are some indicators that are falling currently. I
will elaborate on this later.
Chart 8 Production, Investment, Exports, and World Trade
Inauguration Introduction Consumption Expansion Introduction of Introduction of
of the second of QQE tax hike of QQE QQE with a Negative QQE with Yield
Abe Cabinet Apr. 2013 Apr. 2014 Oct. 2014 Interest Rate Curve Control
Dec. 2012 Jan. 2016 Sep. 2016
s.a., CY 2012 = 100
120
115
110
105
100
95
90
19
└ 2012 └ 13 └ 14 └ 15 └ 16 └ 17 └ 18 └
Industrial production World trade volume
Aggregate supply of capital goods Real exports
Sources: Ministry of Economy, Trade and Industry, "Indices of Industrial Production," "Indices of Industrial
Domestic Shipments and Imports"; CPB Netherlands Bureau for Economic Policy Analysis,
"CPB World Trade Monitor"; Bank of Japan, "Developments in Real Exports and Real Imports."
Chart 9 looks at wages, employment, employee income, which is obtained by multiplying
wages by the number of employees, and consumption.12 The reason why real wages per
worker have not increased is that the number of non-regular workers working short hours has
increased. On the other hand, real employee income was sluggish only in fiscal 2014, the
year of the consumption tax hike; apart from that, it has grown more or less steadily. The
unemployment rate also has steadily declined.
Chart 9 Employment, Income, and Consumption
Inauguration Introduction Consumption Expansion Introduction of Introduction of
of the second of QQE tax hike of QQE QQE with a Negative QQE with Yield
Abe Cabinet Apr. 2013 Apr. 2014 Oct. 2014 Interest Rate Curve Control
Dec. 2012 Jan. 2016 Sep. 2016
s.a., CY 2012 = 100 %
110 5.0
108
4.5
106
104 4.0
102
3.5
100
98 3.0
96
2.5
94
92 2.0
19
└ 2012 └ 13 └ 14 └ 15 └ 16 └ 17 └ 18 └
Number of employees
Consumption activity index (travel balance adjusted, real)
Real wages
Real employee income
Consumption rate (real consumption divided by real employee income)
Unemployment rate (right scale)
Note: Real employee income is calculated as the number of employees multiplied by real wages, which is
total cash earnings deflated by the CPI (all items less imputed rent). The consumption rate is calculated
as the consumption activity index (travel balance adjusted, real) divided by real employee income.
Sources: Ministry of Health, Labour and Welfare, "Monthly Labour Survey"; Ministry of Internal Affairs
and Communications, "Consumer Price Index," "Labour Force Survey"; Bank of Japan,
"Consumption Activity Index."
12
In my past speeches, I defined real employee income as the number of regular employees
multiplied by real wages based on the Monthly Labour Survey. However, taking into account the
difference in the level of the number of regular employees for January 2018, I have redefined real
employee income as the product of the number of employed based on the Labour Force Survey and
real wages based on the Monthly Labour Survey.
Among the different indicators, the one showing the weakest improvement is real
consumption. Consumption as measured by the consumption activity index is still below the
level in 2013; that is, before the spike in demand due to the frontloading of purchases prior
to the consumption tax hike. This is a bit strange given that real employee income, on which
consumption expenditure rests, has been on a steady upward trend and exceeds the 2013
level, albeit with greater fluctuation since the start of 2018. One of the reasons that the
consumption rate (consumption divided by employee income) as defined here has been
falling is that disposable income has not increased as much as employee income due to the
consecutive annual 0.354 percentage point increases in employee pension insurance
premiums. However, because insurance premiums were not raised from 18.3 percent in
September 2018 and will not rise any further, this should lead to a rise in the consumption
rate in the future. Since it is difficult to imagine that the consumption rate will continue to
fall forever, I think that consumption can be expected to recover.
As mentioned earlier, the economy has been recovering due to QQE. However, there is
concern about the risk of a deterioration in economic activity going forward due to the fall
in stock prices since the end of 2018. Often, a decline in stock prices is seen as a harbinger
of a future decline in economic activity. While this is the case, stock markets frequently
seem to overreact to such risks, and whether this leads to deterioration in economic activity
warrants careful monitoring.
Given the risks to economic activity going forward, there certainly are a number of issues to
consider, such as the conduct of economic policy in the United States, trade friction
between the United States and China, the United Kingdom's exit from the European Union
(EU), developments in the European economy, and the slowdown of the Chinese economy.
Among these, I would like to take a closer look at the Chinese economy.
While trends in the Chinese economy are often discussed in terms of real GDP, the decline
in the growth rate appears neat -- having been level or declining by 0.1 percentage point
every quarter -- and thus there are doubts as to whether GDP figures are an accurate
representation of developments in economic activity. Chart 10 shows the level of China's
real GDP (quarterly) and import quantity as well as Japan's industrial production and
exports. Keeping in mind that GDP and imports correlate with each other in general, while
the chart shows that there is no such correlation in the case of China, Japan's production and
exports are linked with China's import quantity. This means that, if China's import quantity
were to decrease further, this would be cause for concern regarding the outlook for Japan's
production and exports.
Chart 10 Correlation of Economic Activity between China and Japan
Inauguration Introduction Consumption Expansion Introduction of Introduction of
of the second of QQE tax hike of QQE QQE with a Negative QQE with Yield
Abe Cabinet Apr. 2013 Apr. 2014 Oct. 2014 Interest Rate Curve Control
Dec. 2012 Jan. 2016 Sep. 2016
s.a., CY 2012 = 100
160
150
140
130
120
110
100
90
80
└ 2012 └ 13 └ 14 └ 15 └ 16 └ 17 └ 18 └ 19
Industrial production (Japan) Import quantity (China) Real GDP (China) Real exports (Japan)
Sources: Ministry of Economy, Trade and Industry, "Indices of Industrial Production"; Bank of Japan,
"Developments in Real Exports and Real Imports"; National Bureau of Statistics of China,
"National Accounts"; Haver Analytics.
If the risks I explained earlier were to materialize, I think it would be necessary to
implement additional monetary easing without delay through quantitative, qualitative, and
interest rate policy measures.
Meanwhile, until last year, there had been debate on financial imbalances and a potential
bubble. However, because stock prices have dropped substantially since then, it would be
rather unreasonable to argue that there are financial imbalances in the stock market now.
III. The Bank's Monetary Easing Policy and the Profitability of Private Banks
While QQE has led to the long-term, structural, and short-term improvements in the
economy that I have described, it also has been argued that a prolonged period of monetary
easing has undermined the profitability of financial institutions. I would like to explain my
views on this.13
First of all, since bold monetary easing has produced favorable results for Japan's economy
as a whole, I feel that it is a bit curious that the same cannot be said about financial
institutions.
Chart 11 shows nominal GDP of the financial and insurance industry (hereafter, financial
industry) and the manufacturing industry, as well as overall nominal GDP of Japan and the
United States. The chart shows that, whereas in the United States, the financial industry's
GDP has been growing along with the growth in overall nominal GDP, in Japan, the
financial industry's GDP has been particularly stagnant amid the sluggishness of nominal
GDP overall. Next, let us look at how nominal GDP has recovered since 2009, the trough
following the outbreak of the global financial crisis in September 2008. Following the drop
in 2009, Japan's nominal GDP stagnated until 2012 but then recovered from 2013, when
QQE was introduced. While nominal GDP of the manufacturing industry has been
recovering along with the recovery in overall nominal GDP, that of the financial industry
does not appear to have recovered. However, as shown in the table underneath the chart, the
financial industry's GDP, which had been decreasing at an annual rate of 2.5 percent until
2012, stopped contracting following the introduction of QQE. This shows that, if nominal
GDP grows, the financial industry's GDP also is likely to grow.
Chart 11 Nominal GDP of the Financial Industry: Comparison between
Japan and the United States
U. S.
Japan
tril. yen tril. yen tril. U.S. dollars tril. U.S. dollars
25 5
600 300
500 250
20 4
400 200
15 3
300 150
10 2
200 100
5 1
100 50
0 0
0 0
1994 97 00 03 06 09 12 15 1994 97 00 03 06 09 12 15
Nominal GDP
Nominal GDP
Manufacturing (right scale)
Manufacturing (right scale)
Finance and insurance (right scale)
Finance and insurance (right scale)
Average Annual Growth Rate of Nominal GDP after the Global Financial Crisis (%)
Japan United States
2009-12 2012-17 2009-12 2012-17
Nominal GDP 0.4 1.9 3.9 3.8
Manufacturing 1.4 3.0 4.2 2.5
Finance and insurance -2.5 0.1 6.4 4.7
Sources: Cabinet Office, "System of National Accounts"; U.S. Bureau of Economic Analysis.
Turning to nominal GDP figures for the United States in Chart 11, overall nominal GDP has
continued to grow after the global financial crisis and, in line with that, nominal GDP
figures for the manufacturing and financial industries also have been growing. Furthermore,
there is no change in the growth trend after 2012 like the one seen in Japan's case. This is
because the Federal Reserve conducted bold monetary easing immediately following the
global financial crisis. Meanwhile, while the fact that the growth rate of the financial
industry exceeds that of overall nominal GDP likely reflects the entrepreneurial spirit of the
U.S. financial industry, if nominal GDP had not grown in the first place, I think that the
growth rate of the financial industry also would have been lower.
The bold monetary easing policy, which aims at achieving the price stability target of 2
percent, has led to an improvement in employment, a rise in wages, and an increase in
corporate profits, as seen in the rise in stock prices. Since nominal GDP is the sum of all
wages and profits, an increase in wages and profits naturally means that nominal GDP also
increases. If nominal GDP increases, banks' nominal GDP also can be expected to increase.
Moreover, the business conditions of firms borrowing money from banks also should
improve, so that among them would be firms that want to borrow more. Credit costs also
have declined as a result.
Monetary Easing Is Creating Demand for Loans
Chart 12 shows the loans and deposits of domestic banks. Starting with loans, these
followed a declining trend after the collapse of the bubble economy. While in the wake of
the introduction of quantitative easing (QE) in 2001 it took a while for loans to start
increasing, they soon started to do so after the introduction of QQE. While loans have
increased by 74 trillion yen from March 2013 to December 2018, deposits have increased
by as much as 147 trillion yen. For banks, deposits can be regarded as their "products" and
loans as their "sales." The difference between "sales" and "products" represents "inventory."
An increase in deposits in excess of the increase in loans thus is equivalent to an increase in
inventories. What is needed, then, is a reduction in inventories. The fundamental reason for
financial institutions' difficulties is that they are accumulating funds but there are no
borrowers.
Chart 12 Loans and Deposits of Private Banks in Japan
Introduction of QQE
tril. yen
800
700
600
500
400
300
200
100
1983 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
Loans and bills discounted Deposits
Note: Domestically licensed banks are banks established under Japanese legislation. Figures
exclude those for Japan Post Bank.
Source: Bank of Japan, "Financial Institutions Accounts."
Policy Tightening Does Not Guarantee a Steepening of the Yield Curve
A decline in interest rates brought about by bold monetary easing results in a deterioration
in private banks' profitability -- this most likely is the case because of the assumption held
by many in the financial communities that the yield curve will steepen, the term spread will
increase, and hence the loan interest rates will increase when the Bank raises interest rates.
Given that private banks borrow short-term debt and finance longer-term lending, their
profits grow if the term spread increases. This is not to say, however, that the term spread
increases with every rise in the interest rate.14 Whether the yield curve flattens or steepens
when short-term interest rates are raised depends on the economic situation as well as the
market's view of monetary policy at the time. Therefore, it is not necessarily the case that
the yield curve will steepen if short-term interest rates are raised.
If Prices Decline, So Will Interest Rates
If prices decline, so will nominal interest rates. Given that the real growth rate normally
declines under such circumstances, so does nominal GDP, or the product of prices and real
production. A decline in nominal GDP represents economic deterioration. This means that
credit costs -- costs resulting from bankruptcies of borrowing firms -- will rise, demand for
loans will decrease, and ultimately interest rates will decline.15
One factor that has a significant impact on financial institutions' profitability is the fact that
many people today have a sufficient amount of cash and deposits, which has naturally
caused the number of borrowers to decrease. Another is credit costs -- in other words, the
devaluation costs of im