September 24, 2024
Bank of Japan
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Osaka
UEDA Kazuo
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. I would like to take this chance to
express my sincerest gratitude for your cooperation with the activities of the Bank of
Japan's branches in Osaka, Kobe, and Kyoto. I look forward to hearing your candid
opinions, which will be useful in the Bank's policy decisions and business operations.
Before hearing from you, I would like to talk about developments in Japan's economic
activity and prices and explain the Bank's thinking on the conduct of monetary policy.
I. Economic Activity and Prices
Current Situation of and Outlook for Economic Activity
Let me start by talking about the current situation of and outlook for economic activity in
Japan. As shown in Chart 1, real GDP for the quarter of 2024 increased clearly.
April-June
The Bank assesses that the economy has recovered moderately, although some weakness
has been seen in part, and expects that it will continue to recover moderately.
Looking at the corporate sector, business sentiment has stayed at a favorable level and
corporate profits have continued to increase. As shown in Chart 2, while the improvement
in corporate profits is particularly notable among large manufacturers, which have benefited
from the weaker yen, corporate profits in the nonmanufacturing industry also have been on
an increasing trend, including at small and firms. Against this background,
medium-sized
firms have indicated that they are planning to maintain strong business fixed investment.
Specifically, they have planned to investment projects, including
medium- long-term
projects related to digitalization and vehicle electrification, projects to address climate
change, and projects associated with urban redevelopment. In addition, firms have made
business fixed investments in response to factors such as the increase in inbound tourism,
and have increased investment given the ongoing labor shortages. Thus, the
labor-saving
Bank expects the virtuous cycle in the corporate sector to continue, in which high levels of
profits lead to increased business fixed investment.
Turning to the household sector, Chart 3 shows that private consumption, particularly of
services, has been on a moderate uptrend, although price rises have affected consumption of
nondurable goods, such as food products and daily necessities, for which price hikes have
been especially large. Against this backdrop, looking at nominal wages in Chart 4,
scheduled cash earnings have risen at a higher rate, reflecting the outcome of the annual
spring wage negotiations, and summer bonuses have increased firmly in
labor-management
response to firms' strong business performance last year. Moreover, the government's cuts in
income tax and inhabitant tax as well as emergency measures against higher electricity and
gas charges, for example, have pushed up households' disposable income in real terms.
Although private consumption is expected to be affected in the short run by factors
including the natural disasters that occurred this summer, it is likely to increase moderately
with rising income.
Of course, there are a variety of both upside and downside risks to this baseline scenario.
Here, I would like to highlight two.
The first is developments in overseas economies, especially the U.S. economy, and their
impact on financial and foreign exchange markets. As shown in Chart 5, while the policy
interest rate in the United States has remained high at over 5 percent, the economy has
nevertheless generally been solid, led by private consumption. Recently, inflation has been
declining as labor market conditions have eased, and last week the Federal Reserve decided
to cut its policy rate. If the Federal Reserve's decision leads to a soft landing for the U.S.
economy, in which the inflation rate declines toward 2 percent while a significant slowdown
in the economy is avoided, this will likely have a positive impact on Japan's economy.
However, uncertainty remains about the future course of the U.S. economy. In particular,
there is uncertainty regarding how the earlier policy rate hikes and other factors will affect
the labor market, and it is necessary to closely examine the impact of easing labor market
conditions on private consumption. The Bank of Japan will continue to closely monitor how
future developments in the U.S. economy and developments in financial and capital markets
in Japan and abroad will affect Japan's economic activity and prices.
The second risk concerns the outlook for private consumption. As I mentioned earlier, a
precondition for the scenario in which private consumption rises moderately is that wages
continue to show solid growth and household income increases. I will discuss this point
later, along with the outlook for prices.
Current Situation of and Outlook for Prices
Let me now turn to developments in prices. As shown in Chart 6, the rate of
year-on-year
change in the consumer price index (CPI) for all items excluding fresh food was 2.8 percent
in August 2024.
A breakdown of the rate of change in the CPI shows that the rates of increase
year-on-year
in the prices of food products and of other goods, which had been pushing up overall prices
substantially until last year, have declined. This is because pressure from the rise
cost-push
in import prices after the pandemic has eased. On the other hand, prices of services, in
which labor costs account for a large share of costs, have continued on a moderate uptrend.
A more detailed look at developments in services prices by item, as depicted in Chart 7,
clearly shows that the impact of wage increases has intensified. That is, while notably large
price increases were seen last year for items such as due to the impact of higher
dining-out
import prices, prices for items with a high labor cost share did not rise much. In contrast,
recently, price increases of around 2 percent can be observed for a wide range of items.
These and price developments suggest that the reason for price
goods- services-level
increases has shifted from the rise in import prices to wage increases that reflect continued
improvement in economic activity.
Under these circumstances, the trend in inflation excluding fluctuations, which
short-term
the Bank calls underlying inflation, is gradually rising toward 2 percent. This is confirmed
by the various estimates of underlying inflation shown in Chart 8.
Looking ahead, underlying inflation is likely to continue rising and in the second half of the
projection period through fiscal 2026 to be at a level that is generally consistent with the
price stability target of 2 percent. This projection is based on the assumption that the
changes in firms' and behavior that have been underway for the past
wage- price-setting
several years will take hold in society and that wage increases will continue into the next
fiscal year and beyond.
Meanwhile, the macroeconomic environment that has supported wage increases to date,
such as labor shortages and favorable corporate profits, has remained in place. Please take a
look at Chart 9. Labor market developments show that the room for further increases in
labor supply is becoming limited, partly reflecting demographic developments, so that the
structural shortage of labor is likely to intensify. Moreover, as I mentioned earlier, corporate
profits have been favorable, and although labor costs have increased, the labor share has in
fact fallen to a level not seen since the first half of the 1990s.
However, it is necessary to carefully examine whether developments in overseas economies
and other factors will have an impact on Japan's corporate profits and corporate behavior. In
addition, attention is warranted on the fact that even if the corporate sector as a whole is
performing well, the business environment faced by individual firms varies amid the
substantial changes in economic activity and prices. The Bank will continue to closely
monitor whether sustained wage hikes and their to selling prices will be
pass-through
achieved in a wide range of firms and whether the linkage between wages and prices will
strengthen steadily.
II. The Bank's Conduct of Monetary Policy
July 2024 Monetary Policy Meeting
Next, I will talk about the Bank's conduct of monetary policy.
At the July 2024 Monetary Policy Meeting (MPM), the Bank decided on a plan for the
reduction of its purchase amount of Japanese government bonds (JGBs) and changed the
policy interest rate. I will first briefly explain the background to these decisions.
Please take a look at Chart 10. Let me start with the plan for the reduction of the purchase
amount of JGBs. The Bank had already decided at the June MPM that it would reduce its
purchase amount of JGBs, based on the understanding that, in principle, interest
long-term
rates are to be formed in financial markets. After carefully collecting views from market
participants, at the July MPM, the Bank decided on a detailed plan for the reduction. Going
forward, it will reduce its purchase amount of JGBs in a predictable manner, while allowing
enough flexibility to support stability in the JGB markets.
Let me move on to Chart 11. The Bank raised the policy interest rate by around 0.15 percent,
deciding to "encourage the uncollateralized overnight call rate to remain at around 0.25
percent." This decision was based on the aforementioned assessment that Japan's economic
activity and prices had been generally in line with the Bank's outlook and that underlying
inflation had risen moderately. In addition, the Bank took into account that import prices
had risen again, reflecting the yen's depreciation since the beginning of this year, and that
this had posed an upside risk to prices. In this situation, the Bank judged it appropriate to
raise the policy interest rate and adjust the degree of monetary accommodation from the
perspective of sustainable and stable achievement of the price stability target of 2 percent.
Market Developments since August and Future Conduct of Monetary Policy
After the turn of August, the U.S. dollar weakened and stock prices declined worldwide,
triggered by a growing concern over a slowdown in the U.S. economy. The U.S.
dollar-yen
exchange rates exhibited more volatility, since large positions that had been built up on a
weaker yen were unwound, partly due to the Bank of Japan's policy change. Stock prices in
Japan declined significantly for a time compared to other economies.
I am aware of the criticism that one of the reasons for such large market fluctuations in
August is that the Bank's thinking on the conduct of monetary policy was not shared widely
enough with the public. The Bank has explained its basic thinking on policy conduct
through, for example, the Outlook for Economic Activity and Prices (Outlook Report),
speeches, and press conferences, and will continue to provide detailed explanation and
communicate carefully to the public. I will take this opportunity today to describe two
points regarding the future conduct of monetary policy, taking account of the change in
situation since August.
The first is the Bank's basic thinking on the conduct of monetary policy. The Bank
considers that, if underlying inflation rises in line with its outlook, it will be appropriate to
accordingly raise the policy interest rate and adjust the degree of monetary accommodation.
The real interest rate, that is, the nominal interest rate minus the expected rate of inflation,
has been significantly negative even after the policy interest rate hike in July, and it is likely
that this will keep stimulating economic activity and pushing up the inflation rate. In the
phase where underlying inflation is around 2 percent, it will become less necessary to
further push up inflation, and thus it will be desirable to bring the policy interest rate closer
to the level that is neutral to economic activity and prices. In other words, if the outlook for
economic activity and prices presented in the Outlook Report is realized, the Bank will
accordingly raise the policy interest rate.
The second point concerns the actual conduct of monetary policy based on this basic
thinking. Given the high uncertainties surrounding economic activity and prices,
unexpected situations may occur. Actual policy needs to be conducted in a timely and
appropriate manner while taking account of various uncertainties, rather than based on a
fixed schedule set in advance.
In the current situation, the Bank needs to monitor with utmost vigilance developments in
overseas economies, particularly the U.S. economy, and those in financial and capital
markets, which have remained unstable. It also needs to carefully examine how these
developments will affect the outlook for Japan's economic activity and prices, risks
surrounding them, and the likelihood of realizing the outlook. Moreover, since Japan has
remained under a low interest rate environment for an extended period of time, it is
important for the Bank to strive to examine how economic activity and prices will respond
to interest rate hikes. Meanwhile, the yen's depreciation has been retraced since
one-sided
August and the rise in import prices has slowed recently. Accordingly, the upside risk to
prices reflecting higher import prices has become smaller. In making policy decisions, the
Bank will need to carefully assess factors such as developments in financial and capital
markets at home and abroad and the situation in overseas economies underlying these
developments. We have enough time to do so.
Achieving price stability through appropriate policy conduct is the basis for sustainable
economic growth. Last year at this meeting, I stated that "achieving the virtuous cycle
between wages and prices could be significantly beneficial both for individual firms and the
overall economy." I am more convinced of this, given that the results of extensive surveys
among firms indicated that many preferred a situation in which wages and prices rise
moderately to a deflationary period in which neither rise. Japan's economy must avoid
returning to deflation. On the other hand, looking back at the history of Japan and overseas,
it is clear that when high inflation takes hold in society or inflation accelerates, this has a
negative effect on economic activity. The Bank will conduct monetary policy as appropriate,
aiming to achieve the price stability target of 2 percent in a sustainable and stable manner,
while taking account of upside and downside risks to economic activity and prices, and I
believe that this stance will bring about positive effects on the national economy as a whole.
Concluding Remarks
Today, I have talked about economic and price developments and the Bank's conduct of
monetary policy. I would like to conclude my speech by touching on the review of
monetary policy from a broad perspective, which began last year.
Through the review, the Bank aims to deepen its understanding on various unconventional
monetary policy measures it has adopted since the late 1990s and to gain insights that will
be useful for future policy conduct. In proceeding with this review, the Bank has
incorporated diverse expertise and has made a particular effort in enhancing the review's
objectivity and transparency by gathering views from professionals in each field, including
at this meeting last year.
Currently, the Bank is compiling the findings from the initiatives just mentioned and
internal analyses. It plans to publish the results by the end of the year after the discussions
at the MPMs. I believe that the process of objectively looking back on the past has allowed
us to better understand why it is taking considerable time to achieve price stability, as well
as the positive effects and side effects of unconventional monetary policy. The results of the
review are not supposed to affect the Bank's conduct of monetary policy in the near term,
but from a somewhat perspective, they are expected to provide valuable inputs
long-term
that will allow us to gain deeper insight into monetary policy.
Thank you very much for your attention.
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Osaka
September 24, 2024
UEDA Kazuo
Governor of the Bank of Japan
Introduction
I. Economic Activity and Prices
II. The Bank's Conduct of Monetary Policy
Concluding Remarks
Chart 1
I. Economic Activity and Prices
Real GDP
s.a., ann., tril. yen
580
570
560
550
540
530
520
510
500
490
FY 13 14 15 16 17 18 19 20 21 22 23 24
Source: Cabinet Office.
1
Chart 2
I. Economic Activity and Prices
Corporate Sector
Business Fixed Investment
Current Profits
y/y % chg.
Manufacturing Non-manufacturing
15
Planned investment in
s.a., tril. yen
s.a., tril. yen the June 2024 survey
10
10
10
:+10.8%
Large firms
Small and medium-sized firms
5
8
8
0
6 6
-5
4
4
-10
2 2
-15
Large firms
Small and medium-sized firms
0 0 -20
CY 10 12 14 16 18 20 22 24
CY 10 12 14 16 18 20 22 24 FY 08 10 12 14 16 18 20 22 24
Notes: 1. Figures for current profits are based on the Financial Statements Statistics of Corporations by Industry, Quarterly and exclude "finance and insurance" and pure holding companies.
2. In the right-hand chart, figures are based on the including software and R&D investments and excluding land purchasing expenses. R&D investment is not included before
Tankan,
the March 2017 survey. Figures are for all industries including financial institutions.
Sources: Ministry of Finance; Bank of Japan.
Household Sector
Real Private Consumption
s.a., CY 2019 = 100
105
100
95
90
85
80
Total real private consumption
75
Of which, services (travel, dining-out, etc.)
70 Of which, nondurable goods
(food products, clothes, daily necessities, etc.)
65
CY 19 20 21 22 23 24
Note: Figures for total real private consumption are the real Consumption Activity Index (travel balance adjusted) based on staff calculations, which exclude inbound tourism consumption
and include outbound tourism consumption.
Source: Bank of Japan.
3
Chart 4
I. Economic Activity and Prices
Nominal Wages
y/y % chg.
4
3
Scheduled cash earnings of full-time employees
2
1
0
-1
CY 19 20 21 22 23 24
U.S. Economy
Policy Interest Rate Employment and Prices
%
% y/y % chg.
6
16 10
14
5
8
Target range for the federal
12
funds rate
4
10
6
3
8
4
6
2
4
2
1
Unemployment rate (left scale)
2
CPI (all items, right scale)
0
0 0
CY 19 20 21 22 23 24
19 20 21 22 23 24
CY
Sources: Bloomberg; Haver.
5
Chart 6
I. Economic Activity and Prices
Price Developments
CPI
y/y % chg.
5
Energy
4
Food products
Goods (less food products) Aug. 2024
3
+2.8%
Services
CPI (less fresh food)
2
+2.0%
CPI (less fresh food and energy)
1
0
-1
-2
CY 19 20 21 22 23 24
Developments in Services Prices
Price Change Distribution of General Services
2. April 2024
1. April 2023
share of the number of items, % share of the number of items, %
30 30
Low labor cost ratio
Low labor cost ratio
High labor cost ratio High labor cost ratio
25 25
20 20
15 15
10 10
5 5
0 0
-2 0 2 4 6 8 10 -2 0 2 4 6 8 10
or more or less or more
or less
y/y % chg. y/y % chg.
Notes: 1. Figures show the CPI for general services (less housing rent). Figures are staff estimates and exclude the effects of policies concerning the provision of free education and
the effects of travel subsidy programs.
2. CPI items are matched to the items in the 2015 Input-Output Tables for Japan and grouped in terms of the share of "wages and salaries" and other labor costs in the domestic
output of those items. Figures for items with a high (low) labor cost ratio are for items that fall into the top (bottom) 50 percent in general services (less housing rent).
Source: Ministry of Internal Affairs and Communications.
7
Chart 8
I. Economic Activity and Prices
Developments in Underlying Inflation
1. Low-Volatility Items and
(Reference) CPI
2. Inflation Expectations
y/y % chg.
Trend Component for Services
5
CPI (less fresh food)
% %
4
4 4
CPI (low-volatility items) Composite index of inflation
expectations (10-year ahead)
Trend component of the CPI
Sub-index for households
for services
3 3 3
Sub-index for firms
Scheduled cash earnings of
full-time employees
Sub-index for economists and
market participants
2 2 2
1
1 1
0 0
0
-1 -1
-1
CY 12 14 16 18 20 22 24 CY 12 14 16 18 20 22 24
CY 12 14 16 18 20 22 24
Notes: 1. In the left-hand chart, figures are staff estimates and exclude mobile phone charges and the effects of the consumption tax hikes, policies concerning the provision of free education,
and travel subsidy programs.
2. For details of the approaches on which the middle and right-hand charts are based, see Box 4 of the April 2024 Outlook Report. In the middle chart, figures for scheduled cash earnings
of full-time employees from 2016 onward are based on continuing observations following the sample revisions.
Sources: Bank of Japan; Ministry of Internal Affairs and Communications; Ministry of Health, Labour and Welfare; QUICK, "QUICK Monthly Market Survey <Bonds>"; Consensus
Economics Inc., "Consensus Forecasts"; Bloomberg.
Labor Market
Working-Age Population and
Labor Share
Number of Employed Persons
ten thous. persons ←Deflation→
4-quarter backward moving avg., %
76
9,000
Projection
8,000 74
7,000
72
6,000
(1) Aged 15-64 (working-age population) 70
(2) Employed persons
5,000
68
3,000
(1) - (2)
66
Projection
2,000
64
1,000
62
0
60
-1,000
CY
84 89 94 99 04 09 14 19 24
FY 70 80 90 00 10 20 30 40
Notes: 1. In the left-hand chart, the projection for the working-age population is by the National Institute of Population and Social Security Research. The projection for the number of
employed persons is calculated based on projections by the Japan Institute for Labour Policy and Training.
2. In the right-hand chart, figures are based on the Financial Statements Statistics of Corporations by Industry, Quarterly. Figures exclude "finance and insurance" and those for
2009/Q2 onward also exclude pure holding companies.
Labor share = Personnel expenses / Value-added, and Value-added = Operation profits + Personnel expenses + Depreciation expenses.
Sources: Ministry of Internal Affairs and Communications; National Institute of Population and Social Security Research; Japan Institute for Labour Policy and Training; Ministry of Finance.
9
Chart 10
II. The Bank's Conduct of Monetary Policy
Decisions at the July 2024 MPM (1): Plan for the Reduction of the Purchase Amount of JGBs
The concept of the plan for the reduction until March 2026
1. Long-term interest rates: to be formed in financial markets in principle
2. JGB purchases: appropriate for the Bank to reduce its purchase amount of JGBs in a predictable manner, while
allowing enough flexibility to support stability in the JGB markets
Reduction in a Predictable Manner
Amount of monthly JGB purchases The Bank's JGB holdings
tril. yen (approximate amount)
tril. yen
600
Interim assessment
In principle, the Bank will
5.7
reduce the planned amount of
5.3
500
its monthly outright purchases
4.9
Roughly
of JGBs by about 400 billion yen
4.5
a 7-8%
4.1 each calendar quarter.
400
decrease
3.7
3.3
2.9
300
From April 2026
The Bank will discuss 200
a guideline in the
interim assessment
100
and announce the
results.
0 0
Jul-24 Oct Jan-25 Apr Jul Oct Jan-26 Apr
CY 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Allowing Enough Flexibility
1. The Bank will conduct an interim assessment of the plan at the June 2025 MPM.
2. In the case of a rapid rise in long-term interest rates, the Bank will make nimble responses by, for example, increasing the
amount of JGB purchases.
3. The Bank is prepared to amend the plan at the MPMs, if deemed necessary.
Chart 11
II. The Bank's Conduct of Monetary Policy
Decisions at the July 2024 MPM (2): Change in the Guideline for Money Market Operations
 Japan's economic activity and prices have been developing generally in line with the Bank's outlook. Moves
to raise wages have been spreading.
 The year-on-year rate of change in import prices has turned positive again, and upside risks to prices require
attention.
Medians of the Policy Board Members' forecasts (y/y % chg.) Risk balance assessments on prices
Fiscal Fiscal Fiscal
Fiscal 2024 Fiscal 2025 Fiscal 2026
2024 2025 2026
(-0.2) ( ― ) ( ― )
Real GDP
0.6 1.0 1.0
CPI (all items less fresh
(-0.3) (+0.2) ( ― )
2.5 2.1 1.9
food)
CPI (all items less Upside Upside Balanced
(― ) ( ― ) ( ― )
1.9 1.9 2.1
fresh food and energy)
Note: Figures in parentheses indicate changes from the April Outlook Report.
Adjusting the degree of monetary accommodation from the perspective of
sustainable and stable achievement of the price stability target of 2 percent
Short-term interest rate
: raised to "around 0.25 %"
(uncollateralized overnight call rate) (previously "around 0 to 0.1%")
 Real interest rates are expected to remain significantly negative, and accommodative financial conditions
will continue to firmly support economic activity.
 If the outlook presented in the July Outlook Report will be realized, the Bank will accordingly continue to
raise the policy interest rate and adjust the degree of monetary accommodation.