November 6, 2023
Bank of Japan
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Nagoya
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 Tokai region. 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
Nagoya Branch. I look forward to exchanging views with you today. In order to deepen its
understanding on the positive effects and side effects of the unconventional monetary policy
measures that have been implemented over the past 25 years, and to gain insights that will
be useful for future policy conduct, the Bank has been reviewing monetary policy from a
broad perspective. In proceeding with the review, it has been exchanging views with people
in various fields. I would appreciate hearing your candid opinions today on topics such as
Japan's economic activity and prices, changes in corporate behavior, and the positive effects
and side effects of the Bank's various policy measures over the past 25 years.
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, while
outlining the latest Outlook for Economic Activity and Prices (Outlook Report), which was
released last week.
I. Economic Developments
Current Situation of Economic Activity and Baseline Scenario of the Outlook
Let me start by talking about economic developments. Japan's economy has recovered
moderately. It is likely to continue recovering, and in the latest Outlook Report, the Bank
projects that the economy will grow at a relatively high rate of 2.0 percent for fiscal 2023
and then continue growing at a rate of around 1 percent for fiscal 2024 and 2025, which is
somewhat above its potential growth rate (Chart 1).
Looking at the corporate sector, although exports have been weak for and other
IT-related
goods amid the lack of momentum in overseas economies, exports overall have been at
higher levels than before the pandemic, mainly on the back of a rise in
automobile-related
exports, which reflects a waning of constraints for semiconductors (Chart 2). In
supply-side
this situation, corporate profits have marked a new record high, mainly due to the
normalization of domestic economic activity and to progress in the of cost
pass-through
increases to selling prices. The expansion in profits has spread to business fixed investment.
The plans for such investment for fiscal 2023 in the September Tankan (Short-Term
Economic Survey of Enterprises in Japan) indicate that investment is likely to increase
clearly, by around 10 percent from fiscal 2022 (Chart 3). Looking ahead, the corporate
sector is expected to continue to see improvement, as a virtuous cycle operates in which
improvement in corporate profits leads to a rise in business fixed investment.
Turning to the household sector, private consumption has been on an increasing trend,
reflecting the materialization of demand, i.e., demand that had been suppressed
pent-up
during the pandemic. It should be noted that, although wage hikes have been achieved
through the annual spring wage negotiations, the pace of increase in
labor-management
private consumption has been moderate so far, with price rises continuing (Chart 4). As for
the outlook, demand is projected to gradually slow, but it is expected that wages
pent-up
will continue increasing firmly in reflection of high prices, and that an underpinning of
private consumption from wage increases will become evident.
Risks Surrounding Economic Activity
However, there are extremely high uncertainties surrounding this baseline scenario.
One major risk concerns overseas economies. Although the International Monetary Fund
(IMF) projects in its latest World Economic Outlook (WEO) that the global economy will
continue growing at a moderate rate of around 3 percent, each economy faces downside
risks. In advanced economies, inflation rates have been declining but are still somewhat
high relative to central bank targets. In the United States in particular, as the economy has
continued to see firm developments, interest rates have risen significantly since
long-term
summer, with market participants expecting prolonged monetary tightening. In addition, it
is possible that the impact of rapid policy interest rate hikes in advanced economies to date
will turn out to be significant, with a time lag, on both the real economies and financial
systems. Given this, due attention needs to be paid to the impact of this risk on global
financial and foreign exchange markets. Attention is also warranted on whether or not the
Chinese economy will lose its recovery momentum as it faces structural issues such as
adjustments in the real estate market. Moreover, it is necessary to keep an eye on the risk of
upward pressure being exerted on prices of commodities, including grains, due to factors
such as geopolitical risks surrounding Ukraine and the Middle East.
On the domestic front, with progress in the of the rise in import prices to
pass-through
consumer prices, attention continues to be warranted on the risk that wage increases will not
catch up with inflation and private consumption will be constrained as a result. In fact, with
regard to food and other items that have seen large price increases, households' defensive
attitudes toward spending such as shifting demand toward inexpensive products have
-- --
been observed. In order for private consumption to remain resilient even after
pent-up
demand slows, it is necessary that wages and prices rise in a manner, which I
well-balanced
will elaborate on later.
II. Price Developments
Current Situation of and Outlook for Prices: Upward Revisions Attributable to the First
Force
I will now turn to price developments in Japan. In the latest Outlook Report, the Bank
projects that the rate of increase in the consumer price index (CPI) for all
year-on-year
items excluding fresh food will remain high at 2.8 percent for fiscal 2023 and 2024 and then
be at 1.7 percent for fiscal 2025 (Chart 5). The projected rates of increase in this CPI for
fiscal 2023 and 2024 are higher than those presented in the July Outlook Report.
Two forces are at work behind the inflation rate remaining relatively high for the time being.
The first force is inflationary pressure resulting from the of the rise in import
pass-through
prices to consumer prices. The rise in import prices, including of energy and grains, has
spread to consumer prices with a time lag. The second force is inflationary pressure
associated with the mechanism whereby wages and prices interact and increase on the back
of continuing economic improvement.
The main reason why the Bank, in its latest Outlook Report, significantly revised upward its
CPI forecasts for the period through fiscal 2024 is that, of those two forces, it deemed that
the first force will persist. With regard to food and daily necessities in particular, while the
of the past rise in import prices to selling prices has diminished for some items
pass-through
and industries, some firms have decided to newly raise their selling prices as price hikes
have spread, including among their competitors. Moreover, assuming that the effects of
pushing down energy prices from the government's economic measures will dissipate next
spring, the recent rise in crude oil prices will exert inflationary pressure, mainly for fiscal
2024.
It should be noted that the rate of increase in import prices, which have been
year-on-year
the driver of the first force, decelerated after reaching a peak in the middle of last year, and
the rate of change has been negative since around spring this year. In addition, the rate of
increase in producer prices has clearly slowed since the beginning of the year, and the
rates of increase in prices of items such as food and daily necessities at
year-on-year
supermarkets and other retail stores have started to decelerate recently (Chart 6). Taking
these points into account, the effects of the first force pushing up prices are likely to
gradually wane, even if a rise in crude oil prices, for example, causes that process to take
time. Based on this thinking, the Bank projects that the rate of increase in the
year-on-year
CPI for all items excluding fresh food for fiscal 2025 will be lower than that for the period
through fiscal 2024.
The Second Force and Sustainable and Stable Achievement of the Price Stability Target
That said, the projected rate of increase in the CPI for fiscal 2025 is at 1.7
year-on-year
percent for all items excluding fresh food and at 1.9 percent for all items excluding energy
in addition to fresh food. The Bank projects that, even after the first force diminishes, the
inflation rate will not return to the range of percent, which was the
0.0-1.0 pre-pandemic
level.
This is because the Bank expects that underlying CPI inflation will increase gradually
toward 2 percent as the second force pushing up prices namely, the virtuous cycle
--
between wages and prices strengthens.
--
The Bank has been aiming to achieve the price stability target of 2 percent in a sustainable
and stable manner, accompanied by wage increases, as the second force strengthens.
Recently, some aspects of firms' behavior have begun to shift more toward raising wages
and prices. On the wage side, the wage growth rate agreed in this year's annual spring
labor-management wage negotiations marked the highest level in 30 years, partly on the
back of price rises. As for price setting, some firms in industries where personnel expenses
account for a large proportion of costs have reported that they have raised prices in
anticipation of a continued increase in personnel expenses. Looking at the Tankan, figures
for firms' outlook for output prices for one year ahead have declined because raw material
costs have settled down, while those for five years ahead have increased somewhat,
particularly for the nonmanufacturing industry. This suggests that firms may have started to
expect that there will be a continued increase in costs such as wages. In addition,
medium-
to inflation expectations have risen moderately, which seems to have influenced
long-term
firms' and behavior (Chart 7).
wage- price-setting
In this situation, the likelihood of realizing the outlook for achieving the price stability
target of 2 percent seems to be gradually rising. However, as there are high uncertainties
over the extent to which the second force will strengthen, sustainable and stable
achievement of the price stability target is not yet envisaged with sufficient certainty at this
point. Mainly due to the experience of prolonged low growth and deflation, the behavior
and mindset based on the assumption that wages and prices will not increase easily have
been entrenched in Japanese society, continuing to make it difficult for the second force to
take effect. It is necessary to closely examine whether changes in firms' and
wage-
behavior will become widespread and the virtuous cycle between wages and
price-setting
prices will intensify. I would like to raise two points that may be crucial in making such an
examination.
The first point concerns whether wage hikes will continue and take hold in society. In
particular, next year's annual spring wage negotiations are an important
labor-management
aspect of the examination, and it is necessary to closely monitor developments in these
negotiations. Regarding the environment surrounding wages, labor market conditions have
steadily tightened. The Tankan shows that the net "insufficient" in the diffusion index (DI)
for employment conditions has expanded to a level close to its peak. As the
pre-pandemic
labor market for regular employees looking for new jobs has expanded, it may have become
easier for the effects of the tightening of labor market conditions to spill over to wages
(Chart 8). Corporate profits, which are the source of wage hikes, have marked a new record
high on the whole. However, the pace of improvement in profits varies across industries and
firm sizes. Some firms, especially small and firms, have reported that they
medium-sized
had raised wages this year at a time when their profitability was not necessarily adequate. It
is thus unclear whether these firms will continue with moves to raise wages next year. The
Bank will examine changes in firms' behavior by continuing to assess
wage-setting
developments in labor market conditions and corporate profits, and by carefully analyzing
corporate behavior using both macro data and anecdotal information.
The second point concerns whether firms' stance will shift more toward raising their selling
prices while taking account of increases in costs such as wages. In order for the virtuous
cycle between wages and prices to be realized, firms need to stably secure profits as a
source for future wage hikes. As I pointed out earlier, there have been new developments in
some firms' behavior. However, many argue that, unlike raw material costs,
price-setting
increases in wages and other indirect costs are difficult to pass on to selling prices. The
Bank needs to monitor developments going forward to see if changes in firms'
price-setting
behavior will become widespread.
III. The Bank's Conduct of Monetary Policy
Basic Thinking on the Conduct of Monetary Policy
Now, I would like to talk about the Bank's conduct of monetary policy.
As I have explained thus far, the Bank's projection that underlying CPI inflation will
increase is based on the expectation that the virtuous cycle between wages and prices will
intensify. In this regard, it is encouraging to see that some aspects of firms' behavior have
begun to shift more toward raising wages and prices. However, as I mentioned earlier, it is
still unclear whether the virtuous cycle will intensify as expected. In this situation, the
Bank's basic thinking on the conduct of monetary policy is that it will patiently continue
with monetary easing under the framework of yield curve control, aiming to support Japan's
economic activity and thereby facilitate a favorable environment for wage increases.
Conduct of Yield Curve Control
Meanwhile, in order to patiently continue with monetary easing under the framework of
yield curve control, it is necessary to strike a balance between the economic stimulus effects
stemming from strictly keeping interest rates at low levels and the resulting side
long-term
effects.
Based on this thinking, the Bank decided to modify the conduct of yield curve control at the
Monetary Policy Meeting held last week. Specifically, while the Bank maintained the target
level of Japanese government bond (JGB) yields at around zero percent, it decided
10-year
to conduct yield curve control with the upper bound of 1.0 percent for these yields as a
reference and to control the yields mainly through JGB purchases and nimble
large-scale
market operations. Operations through which the Bank offered to purchase an unlimited
amount of JGBs at 1.0 percent every business day were ceased. These decisions
10-year
were made because, with extremely high uncertainties surrounding economies and financial
markets at home and abroad, the Bank judged it appropriate to increase the flexibility in the
conduct of yield curve control, so that interest rates will be formed smoothly in
long-term
financial markets in response to future developments (Chart 9). In a phase where upward
pressure is exerted on interest rates, strictly capping interest rates could affect the
long-term
functioning of bond markets and the volatility in other financial markets. The modification
of the conduct of yield curve control is likely to contribute to mitigating such side effects.
Even in this modified conduct of yield curve control, the Bank will continue with
JGB purchases and, in a phase of rising interest rates, will keep making nimble
large-scale
responses through market operations depending on factors such as the levels and the pace of
change in interest rates. Therefore, the Bank deems that JGB yields are
long-term 10-year
unlikely to be significantly above 1 percent even if upward pressure is exerted on them.
Although interest rates could rise somewhat, real interest rates, which are
long-term
adjusted by inflation expectations, are important in capturing the effects of monetary policy
on economic activity and prices. As I explained earlier, since last year, inflation
expectations have risen moderately and, despite an increase in interest rates, real
long-term
interest rates have continued to be negative. As real interest rates are likely to remain so,
sufficiently accommodative financial conditions are expected to be maintained.
Concluding Remarks
In closing, I would like to touch on the Tokai region's economy from a medium- to
perspective.
long-term
Let me first comment on the progress with innovation. The Tokai region has been Japan's
important base for monozukuri (manufacturing) and its competitiveness has been supported
by constant innovation, which has seen new developments recently. For instance, as the
electrification of vehicles progresses, major changes have started to take place in the
automobile industry, including its supply chains, with technologies that could transform the
industry itself being launched one after another. In addition, numerous firms and local
governments have been collaborating on, for example, building supply chains for hydrogen
and ammonia as well as carrying out experiments with a view to creating demand for these
fuel sources. Moreover, firms in industries, including the robotics industry,
cutting-edge
have been gathering in the Tokai region, with active support from local governments. It is
encouraging to see such efforts being made to ensure that the region continues to be a
wellspring of innovation for Japan.
Furthermore, the Tokai region has been attracting attention for a theme park that aims at
coexistence with nature, and progress has been made in efforts to enhance the appeal of
cities in the region, including redevelopment of city centers.
I would like to close by expressing my hope that the Tokai region will increase its appeal
further and be chosen by many people both as a base for monozukuri and as a tourist
destination, and that its economy will thereby develop in a sustainable and diverse manner.
Thank you very much for your attention.
Economy
Japan's and Monetary Policy
Speech at a Meeting with Business Leaders in Nagoya
November 6, 2023
UEDA Kazuo
Governor of the Bank of Japan
Introduction
I. Economic Developments
II. Price Developments
III. The Bank's Conduct of Monetary Policy
Concluding Remarks
Chart 1
I. Economic Developments
The BOJ's Forecasts for Real GDP
(Oct. 2023 Outlook Report)
s.a., ann., tril. yen
580
570
FY 2025
560 +1.0%
FY 2024
+1.0%
FY 2023
550
+2.0%
540
530
520
510
500
490
FY 13 14 15 16 17 18 19 20 21 22 23 24 25
Note: The forecasts presented are the medians of the Policy Board members' forecasts. The values of real GDP for fiscal 2023 onward are calculated by multiplying the actual figure for
fiscal 2022 by all successive projected growth rates for each year.
Sources: Cabinet Office; Bank of Japan.
1
Chart 2
I. Economic Developments
Corporate Sector: Exports
Real Exports Real Exports by Item
s.a., CY 2019 = 100 s.a., CY 2019 = 100
s.a., CY 2019 = 100
115 120 120 180
Motor vehicles and
110
related goods
110 110 160
105
100 100 140
100
90 90 120
95
80 80 100
90
IT-related goods
Real exports from Japan 70 70 80
(left scale)
85
World trade volume Semiconductor
60 60 60
80 production equipment
(right scale)
75 50 50 40
CY 15 16 17 18 19 20 21 22 23 CY 19 20 21 22 23 CY 19 20 21 22 23
Chart 3
I. Economic Developments
Corporate Sector: Profits and Business Fixed Investment
Business Fixed Investment
Current Profits
s.a., tril. yen y/y % chg.
16
20
14
15
+13.1%
12
10
+7.6%
10
5
8
0
6 -5
Actual
4
-10
Large firms Planned investment in current
fiscal year as of the Sept. survey
2 -15
Small and medium-sized firms
of each year
0 -20
CY 07 09 11 13 15 17 19 21 23 FY
07 09 11 13 15 17 19 21 23
Notes: 1. In the left-hand chart, figures are based on the Financial Statements Statistics of Corporations by Industry, Quarterly and exclude "finance and insurance." Figures from 2009/Q2
onward exclude pure holding companies.
2. In the right-hand chart, figures are based on the Tankan, including software and R&D investments and excluding land purchasing expenses. R&D investment is not included before
the March 2017 survey. Figures are for all industries including financial institutions.
Sources: Ministry of Finance; Bank of Japan.
3
Chart 4
I. Economic Developments
Household Sector
Scheduled Cash Earnings Employee Income Consumption Activity Index
y/y % chg.
s.a., CY 2019 = 100
y/y % chg.
5
110
7
4
105
6
3
100
5
2 95
4
1
90
3
0 85
2
-1
1 80
-2 75
0
-3
-1 70
Scheduled cash earnings for full-time
Nominal wages (total cash earnings)
Total real private consumption
employees
Number of employees
-2 -4 65
Hourly scheduled cash earnings for
Employee income
Of which, services
part-time employees
Real employee income
-3 -5 60
17 18 19 20 21 22 23 CY 17 18 19 20 21 22 23 CY 17 18 19 20 21 22 23
CY
Notes: 1. In the left-hand and middle charts, Q1 = March-May, Q2 = June-August, Q3 = September-November, Q4 = December-February. Figures are based on continuing observations following
the sample revisions of the
Monthly Labour Survey.
2. In the middle chart, Employee income = Total cash earnings × Number of employees Figures for real employee income are based on
(Monthly Labour Survey) (Labour Force Survey).
staff calculations using the CPI (less imputed rent).
3. In the right-hand chart, 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.
4
Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications; Bank of Japan.
The BOJ's Forecasts for the CPI
(Oct. 2023 Outlook Report)
Developments over Time Forecasts
y/y % chg.
y/y % chg.
5
5
Energy
4 +3.8%
4
Food products
Goods (less food products)
3
+2.8% +2.8% 3
Services
CPI (less fresh food)
+1.9%
2
2
CPI (less fresh food and energy)
+1.9%
+1.7%
1
1
0 0
CPI (less fresh food)
-1 -1
CPI (less fresh food and energy)
-2 -2
CY 19 20 21 22 23 FY 23 24 25
Note: In the right-hand chart, figures are the medians of the Policy Board members' forecasts.
Sources: Ministry of Internal Affairs and Communications; Bank of Japan.
5
Chart 6
II. Price Developments
Current Situation Surrounding the First Force
High-Frequency Data for
Producer Prices
Import Prices
Consumer Prices
y/y % chg. y/y % chg. y/y % chg.
60 18
12
T-index (Nikkei CPINow)
Producer price index
50 15
10 SRI-Hitotsubashi Unit Value
Services producer price index
Price Index
40 12
8
30 9
6
20 6
4
10 3
2
0 0
0
-10 -3
-2
-20 -6
-4
CY 19 20 21 22 23 19 20 21 22 23
CY CY 19 20 21 22 23
Current Situation Surrounding the Second Force:
Changes in Corporate Behavior
Firms' Outlook for Output Prices in the Tankan
Inflation Expectations
Manufacturing Nonmanufacturing
y/y, ann. avg., %
chg. from the current level, % chg. from the current level, %
2.5
5.0 5.0
Market participants (QUICK, 2 to 10 years ahead)
1 year ahead 1 year ahead
4.5 4.5 Economists 1 (6 to 10 years ahead)
Economists 2 (7 to 11 years ahead)
3 years ahead
3 years ahead
4.0 4.0
2.0 Households (over the next 5 years)
5 years ahead
5 years ahead Firms (5 years ahead)
3.5 3.5
3.0 3.0
1.5
2.5 2.5
2.0 2.0
1.0
1.5 1.5
1.0 1.0
0.5
0.5 0.5
0.0 0.0
-0.5 -0.5 0.0
CY 14 16 18 20 22 CY 14 16 18 20 22 CY 05 07 09 11 13 15 17 19 21 23
Note: In the right-hand chart, "Economists 1" shows the forecasts of economists in the while "Economists 2" shows the forecasts of forecasters surveyed for the
Consensus Forecasts, ESP
Figures for households are from the estimated using the modified Carlson-Parkin method for a 5-choice question.
Forecast. Opinion Survey on the General Public's Views and Behavior,
Figures for firms show the inflation outlook of enterprises for general prices (all industries and enterprises, average) in the
Tankan.
Sources: Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>"; JCER, "ESP Forecast"; Consensus Economics Inc., "Consensus Forecasts."
7
Chart 8
II. Price Developments
Current Situation Surrounding the Second Force:
Labor Market Conditions
Job-Switching Rates among
Firms' Perception of Firms' Perception of
Regular Employee Shortage Regular Employees
Labor Shortage
inverted, DI ("excessive"
"insufficient"), % points DI ("shortage" - "surplus"), % points
%
%
-40 3
50 8
"Insufficient"
"Shortage"
2
7
-30
40
1
"Excessive" 6
"Surplus"
-20
0
30
5
-10
-1
20 4
-2
0
3
-3
10
10 Regular employees, etc.
2
-4
Part-time employees
Employment conditions DI 0
20
1
(left scale)
-5
Output gap (right scale)
30 -6 -10 0
CY CY 16 17 18 19 20 21 22
10 12 14 16 18 20 22 10 12 14 16 18 20 22 CY
Chart 9
III. The Bank's Conduct of Monetary Policy
Further Increasing the Flexibility in the Conduct of Yield Curve Control (YCC)
 The Bank will patiently continue with monetary easing under Yield Curve Control (the short-term policy interest rate:
-0.1%, the long-term interest rate: around 0%), aiming to support Japan's economic activity and thereby facilitate a
favorable environment for wage increases.
 Toward the end of the projection period, the Bank expects that underlying CPI inflation will increase gradually
toward achieving the price stability target of 2 percent, while this increase needs to be accompanied by an
intensified virtuous cycle between wages and prices.
 With extremely high uncertainties surrounding economies and financial markets at home and abroad, the Bank judges
that it is appropriate to increase the flexibility in the conduct of yield curve control, so that long-term interest rates
will be formed smoothly in financial markets in response to future developments.
<Previous Conduct of YCC> <Conduct of YCC after Further Increasing the Flexibility>
%
%
Strictly capping 10-year JGB yields
Nimbly conducting
Nimbly conducting
by fixed-rate purchase operations
market operations
market operations
↓
1.0
1.0
Upper bound for
0.5
Range of 10-year JGB
10-year JGB yields
yields fluctuations
0.0
as a reference
0.0
as a reference
-0.5
<Outlook for Prices>
y/y % chg.
Fiscal 2023 Fiscal 2024 Fiscal 2025
Forecasts Forecasts Forecasts
made in July made in July made in July
CPI
+2.8 +2.5 +2.8 +1.9 +1.7 +1.6
(all items less fresh food)
(Reference) CPI
+3.8 +3.2 +1.9 +1.7 +1.9 +1.8
(all items less fresh food and energy)
Note: Figures indicate the medians of the Policy Board members' forecasts (point estimates).