September 24, 2019
Bank of Japan
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Osaka
Haruhiko Kuroda
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 opportunity 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 Monetary Policy Meeting (MPM) held last week, the Bank, regarding the price
developments in Japan, judged that it was becoming necessary to pay closer attention to the
possibility that the momentum toward achieving the price stability target of 2 percent will
be lost. The Bank also made clear in its policy statement that, while taking this situation
into account, it will reexamine economic and price developments at the next MPM, when it
compiles the Outlook for Economic Activity and Prices (Outlook Report). Today, I would
like to talk about the Bank's view regarding the economic and price developments on which
its judgment was based and then explain the basic thinking behind the conduct of monetary
policy.
I. Economic Developments at Home and Abroad
Let me start by talking about developments in overseas economies. Overseas economies
have been growing moderately on the whole, but the pace has continued to decelerate since
World Economic Outlook Update
the start of the year (Chart 1). According to the (WEO)
released by the International Monetary Fund (IMF) in July, growth is forecast at 3.2 percent
in 2019 on a year-on-year basis, marking a decline from the previous year's figure of 3.6
percent. Growth in the world trade volume has been decelerating clearly, mainly against the
background of the increasing and prolonged U.S.-China trade friction and adjustments in
IT-related goods. The diffusion indexes (DIs) for business sentiment of manufacturing firms
on a global basis have remained below 50 since May, which is the borderline between
improvement and deterioration of business conditions perceived by firms. Looking at
developments in major regions, the U.S. economy has continued to expand moderately,
supported primarily by an increase in private consumption. On the other hand, the Chinese
and European economies have continued to be somewhat weak. Specifically, the
manufacturing sector in China has remained weak, mainly due to the effects of additional
tariffs imposed by the United States and the authorities' measures to push forward with
deleveraging. As for Europe, production has declined since the second half of last year,
mainly in Germany, partly reflecting the tightening of gas emission regulations on
automobiles within the European Union (EU), and weaker exports to China also have been
exerting downward pressure on the European economy.
Looking at Japan's economy, exports -- mainly those of capital goods related to business
fixed investment to China as well as the NIEs and the ASEAN economies -- have been
relatively weak since the turn of the year, affected by the slowdown in overseas economies
(Chart 2). In addition, weakness in exports and related production is leading manufacturing
firms to have cautious sentiment. On this point, since the Kansai region, in particular, has a
strong economic relationship with the Asian economies, such as China, you may feel such
developments.
That said, domestic demand has remained firm. Thus far, the effects of the slowdown in
overseas economies do not seem to be exerting on domestic demand (Chart 3). Business
fixed investment has continued on an increasing trend, with corporate profits staying at high
Financial Statements Statistics of Corporations by
levels on the whole. According to the
Industry, Quarterly (FSSC), the ratio of current profits to sales for all industries and
enterprises has remained at a historically high level. In this situation, business fixed
investment on a GDP basis has maintained its uptrend, being positive for the April-June
quarter on a quarter-on-quarter basis. Turning to the household sector, private consumption
has increased moderately, albeit with fluctuations. This is mainly attributable to the
continued improvement in the employment and income situation (Chart 4). The active job
openings-to-applicants ratio has been at a high level that exceeds the peak marked during
the bubble period, and the unemployment rate has been in the range of 2.0-2.5 percent,
remaining at around a low level that was observed during the bubble period. While labor
market conditions have remained tight, employee income has been increasing. Japan's
economy thus has been on a moderate expanding trend, with a virtuous cycle from income
to spending continuing to operate in both the corporate and household sectors, although
exports have shown some weakness.
With regard to the outlook, Japan's economy is likely to continue on a moderate expanding
trend, despite being affected by the slowdown in overseas economies for the time being.
The keys to this outlook are the following: (1) the timing of a pick-up in overseas
economies and (2) whether the firmness in domestic demand will be sustained until that
happens.
I now would like to talk about the sustainability of domestic demand. Private consumption
is expected to continue increasing moderately as the employment and income situation
continues to improve. Although the impact of the scheduled consumption tax hike warrants
attention, it is likely to be marginal compared to that of the previous tax hike in 2014,
mainly because an increase in household burden will be smaller and various measures to
smooth out demand prior to and after the tax hike will be implemented. In addition,
government spending is expected to underpin the economic activity going forward, mainly
on the back of an increase in public investment accompanied by policy measures for
national resilience and of spending on hosting the Olympic and Paralympic Games. The
sustainability of domestic demand depends on business fixed investment. Business fixed
investment has been steady despite the slowdown in overseas economies, and this likely is
attributable to an increase in investment that is relatively less susceptible to changes in
overseas demand and the business cycle, including that aimed at improving efficiency and
saving labor in order to deal with labor shortage, that in research and development (R&D)
for growth areas, and that related to urban redevelopment projects. In fact, in the Kansai
region, an increase is seen in a wide range of medium- to long-term strategic investment,
such as R&D investment in life science, which is the theme of the World Expo to be held in
Osaka, Kansai, and investment related to the digitalization of automobiles and use of 5G
network. Also, the redevelopment projects in Osaka are getting underway in such areas as
Kita (or "the North") and Minami (or "the South"). With regard to the outlook, business
fixed investment is expected to increase moderately on the back of high levels of corporate
profits and highly stimulative financial conditions. Thus, it can be said that the
sustainability of domestic demand in Japan is substantially high. However, business and
household sentiment could be affected, depending on developments in overseas economies
and financial markets. In particular, if the slowdown in overseas economies lasts longer
than expected, it is necessary to pay attention to the possibility that firms' investment stance
will become cautious, mainly in the manufacturing sector.
Next, I would like to explain the other key point, which is the outlook for overseas
economies. Although it is likely that slowdowns will continue to be observed for the time
being, the growth rates are projected to rise somewhat thereafter, partly backed by the
materialization of the effects of fiscal and monetary policies in each economy and the
progress in global adjustments in IT-related goods. Thus, overseas economies are expected
to grow moderately on the whole. As for now, overseas economies are projected to pick up
in the second half of 2019 and into 2020, which is in line with the projections made by such
as the IMF. On this point, adjustments in IT-related goods seem to be moving out of the
phase of continued deterioration, but there is no clear sign that the global economy will turn
to a pick-up. Under these circumstances, downside risks concerning overseas economies
seem to be increasing (Chart 5). Since both the United States and China have been
increasing incrementally the number of goods subject to additional tariffs, the trade friction
between these economies appears to be increasing and becoming more prolonged. They are
exhibiting a stance of continuing with the negotiations, but future developments continue to
warrant attention. In addition to the trade friction, uncertainties concerning overseas
economies include various factors such as the consequences of the negotiations on the
United Kingdom's exit from the EU, the effects of stimulus measures in China, and
geopolitical risks in the Middle East. Uncertainties surrounding developments in emerging
economies also are of concern. Thus, in a situation where downside risks concerning
overseas economies seem to be increasing, it is necessary to bear in mind the possibility that
the pick-up will lag behind by longer than expected. The Bank judges that it is becoming
necessary to closely examine whether overseas economies will pick up while the
aforementioned firmness in domestic demand is being maintained.
II. Price Developments in Japan
Let me move on to price developments. The year-on-year rate of change in the consumer
price index (CPI) has been at around 0.5 percent (Chart 6). It has been relatively weak
compared to the economic expansion and tight labor market conditions. While there are
various reasons for this, it seems to be affected largely by the fact that the mindset and
behavior based on the assumption that wages and prices will not increase easily have been
deeply entrenched in Japan, due to the experience of prolonged low growth and deflation.
Thus, it is taking time for firms' cautious wage- and price-setting stance, as well as
households' cautiousness toward price rises, to change.
However, the basic mechanism has continued to operate in which a positive output gap -- a
rise in the level of economic activity -- results in moderate increases in wages and prices.
Let me elaborate on this point. As I mentioned earlier, in a situation where the economy has
been expanding moderately and labor market conditions have remained tight, wages of
employees have continued to rise and base pay increases have been achieved for a sixth
consecutive year. On the other hand, firms have faced upward pressure such as of personnel
expenses and distribution costs on prices resulting from an increase in economic activity. In
this situation, moves to raise selling prices have been spreading gradually among firms
Tankan
(Chart 7). Regarding the output prices DI in the (Short-Term Economic Survey of
Enterprises in Japan), the situation has continued for seven consecutive quarters in which
the proportion of enterprises answering that the output prices have risen has exceeded the
proportion of those answering that such prices have fallen. This already has lasted for a
longer period than that observed during the bubble period. Firms' stance steadily has shifted
toward further raising prices. In addition, looking at annual price changes across all CPI
items, the share of price-increasing items minus the share of price-decreasing items recently
has been increasing moderately. Of course, the reason why firms can raise selling prices is
that households' tolerance of price rises has been increasing, albeit moderately, on the back
of improvement in the employment and income situation. Such improvement has been
achieved especially because the economy has been expanding moderately and the positive
output gap has been maintained.
As for the outlook, it is likely that Japan's economy will continue on an expanding trend and
the output gap will remain positive. With the level of economic activity remaining high,
firms' stance is expected to gradually shift toward further raising wages and prices and
medium- to long-term inflation expectations of firms and households, which have been
more or less unchanged recently, are projected to rise gradually. Under these circumstances,
the year-on-year rate of change in the CPI is likely to increase gradually toward 2 percent,
although this will take time.
Regarding this baseline scenario of the outlook for prices, however, risks are skewed to the
downside. In particular, recently, slowdowns in overseas economies have continued to be
observed and their downside risks seem to be increasing. Thus, it is necessary to pay closer
attention to the risk that the economic slowdown stemming from overseas economies will
spread to prices. I will elaborate on this point later when I talk about the Bank's thinking
behind the conduct of monetary policy.
III. The Bank's Conduct of Monetary Policy
Now, I would like to talk about the Bank's conduct of monetary policy.
The Bank has been pursuing powerful monetary easing under the framework of
"Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control," aiming to
achieve the price stability target of 2 percent (Chart 8). The main transmission mechanism
of monetary easing that the Bank assumes is to lower real interest rates, which are
calculated by subtracting inflation expectations from nominal interest rates. Real interest
rates currently are well below the natural rate of interest, which is neutral to economic
conditions, and are stimulating a wide range of economic activities. In this situation, the
inflation mechanism driven by the positive output gap has been operating, as I mentioned
earlier. In order to achieve the price stability target, the Bank considers it important to
ensure that the inflation mechanism continues to operate and thereby maintain the
momentum toward achieving the target.
This stance of monetary policy conduct by the Bank basically has not changed from a year
ago, when I spoke at this meeting last time. On the other hand, monetary policy conduct of
major central banks abroad has changed significantly from last year's moves toward
normalization. This month, the European Central Bank (ECB) decided to lower one of its
policy rates and restart its asset purchases, and the Federal Reserve also decided to lower its
policy rate, following the rate cut in July. Factors that lie behind these decisions are the
prolonged slowdown in the global economy and heightening uncertainties, which Japan is
also facing. At the press conference after the decision to take monetary easing measures,
President Draghi of the ECB underlined that, in an environment of prolonged uncertainties
related to, for example, geopolitical factors and the rising threat of protectionism,
international trade had been weakening and downside risks surrounding the euro area
economy were significant.
The Bank of Japan has the same policy stance, in that preventing and insuring against risks
are taken into consideration when conducting monetary policy. In doing so, what is
essential for the Bank is assessment of the momentum toward achieving the price stability
target of 2 percent. If there is a greater possibility that such momentum will be lost, the
Bank will not hesitate to take additional easing measures. While various factors are
considered when examining the momentum toward achieving the price stability target, the
following two points are particularly important. First is whether the positive output gap, or
the high level of economic activity, will be maintained, and whether firms' stance will shift
toward further raising wages and prices under such situation. Second is developments in
medium- to long-term inflation expectations of firms and households. Based on these points,
the Bank deems that the momentum toward achieving the price stability target has been
maintained so far. With the output gap remaining positive, moves to raise selling prices
reflecting cost increases have been observed recently in a wide range of firms. As for the
outlook, inflation expectations are projected to rise as many of the factors that have been
delaying inflation will be resolved gradually and moves to raise prices will spread widely.
Under these circumstances, the year-on-year rate of change in the CPI is likely to increase
gradually toward 2 percent. Thus, the Bank judges it appropriate to continue with the
current monetary policy.
However, given that slowdowns in overseas economies have continued to be observed and
their downside risks seem to be increasing, it is becoming necessary to pay closer attention
to the possibility that the momentum toward achieving the price stability target will be lost.
Developments in the output gap warrant particular attention. If downside risks to overseas
economies materialize, there is a possibility that the growth rate of Japan's economy will
decelerate substantially through, for example, the prolonged weak exports and firms'
investment stance becoming cautious. If this happens, the momentum toward achieving the
price stability target could be affected through shrinkage of the output gap. Attention also
should be paid to the fact that the impact of the so-called adaptive formation mechanism is
large in Japan, in which the actual inflation rate affects inflation expectations. Although
crude oil prices temporarily rose somewhat due to increased geopolitical risks, they have
declined to some extent from a somewhat longer-term perspective, mainly against the
background of the slowdown in overseas economies. If crude oil prices decline further and
the actual inflation rate decreases clearly, inflation expectations also may be affected.
Considering that it is becoming necessary to pay closer attention to the possibility that the
momentum toward achieving the price stability target will be lost, the Bank will thoroughly
reexamine economic and price developments at the next MPM, when it releases the Outlook
Report. It will examine economic and price developments from a broad perspective at the
next MPM, based on observations that will be available by the time of the meeting, such as
various economic indicators, the reports at the meeting of general managers of the Bank's
branches, and developments in financial markets. Recently, the situation has been changing
rapidly, with investors' risk aversion abating somewhat due to expectations for progress in
U.S.-China trade negotiations. Let me also add that the Bank does not have any
preconception at this point regarding the outcome of its examination.
Before closing my speech, I would like to elaborate on the Bank's basic thinking on the
current conduct of monetary policy. There are three points.
First, the Bank's conduct of monetary policy will continue to be based on the current
framework of "QQE with Yield Curve Control," which is highly sustainable and enables the
Bank to make flexible adjustments according to developments in economic activity and
prices as well as financial conditions. Possible measures for monetary easing include cutting
the short-term policy interest rate, lowering the target level of 10-year Japanese government
bond (JGB) yields, expanding asset purchases, and accelerating the expansion of the
monetary base. Combinations or applications of these various measures would also be an
option. The Bank will take appropriate measures depending on the situation, but in any
event, the policy effects will be exerted basically through real interest rates and risk premia
of asset prices.
Second, the Bank considers that the conclusion reached in the Comprehensive Assessment
released in September 2016, in which it assessed the policy effects and their transmission
mechanism since the introduction of QQE, is still valid even in the present situation. For
example, there is no change in our recognition regarding the impact on economic activity
and prices of the term structure of interest rates, in that short- and medium-term interest
rates have a larger impact than longer-term rates. On the other hand, the Bank continues to
take the view that an excessive decline in super-long-term interest rates could lower the
rates of return such as on insurance and pension products, and this may exert a negative
impact on economic activity through a deterioration in people's sentiment.
And third, it is important to consider appropriate monetary policy measures while
thoroughly weighing their benefits and costs. As I mentioned earlier, "QQE with Yield
Curve Control" has been exerting its effects firmly by stimulating a broad range of
economic activities through the decline in real interest rates. That said, if the low interest
rate environment is prolonged further, it will become necessary to pay closer attention to the
costs of policy measures, including the impact on the functioning of financial
intermediation and market functioning. Thus, the Bank recognizes that there remains an
important challenge to consider what is required to further enhance the sustainability of
policy measures.
The Bank will continue to pursue policy conduct in an appropriate manner without
preconception, taking account of developments in economic activity and prices as well as
financial conditions, while carefully examining various risks. It also will continue to make
its utmost efforts as a central bank and strongly support firms' activity in Japan.
Thank you very much for your attention.
Japan's Economy and Monetary Policy
Speech at a Meeting with Business Leaders in Osaka
September 24, 2019
Haruhiko Kuroda
Governor of the Bank of Japan
Introduction
I. Economic Developments at Home and Abroad
II. Price Developments in Japan
III. The Bank's Conduct of Monetary Policy
Global Economy
Global Growth Rate (IMF Projections) World Trade Volume
y/y % chg. y/y % chg.
6.0 6
5
5.5
4
5.0
3
2020: +3.5%
4.5 2
2018: +3.6%
1
4.0
0
3.5
-1
CY
12 13 14 15 16 17 18 19
3.0
Global Manufacturing PMI
2.5
Global economy
2019: +3.2%
Average from 1980
s.a., DI.
59
Advanced economies
through 2018:
2.0
Projections Emerging and commodity-exporting economies
+3.5%
1.5 56
1.0
53
0.5
50
0.0
-0.5 47
CY 00 02 04 06 08 10 12 14 16 18 20 CY 12 13 14 15 16 17 18 19
Notes: 1. In the left chart, figures for 2019 and 2020 are IMF's projections as of July 2019.
Notes: 2. In the upper right chart, figures are those for real imports.
Notes: 3. In the lower right chart, figures for the global economy are the "J.P. Morgan Global Manufacturing PMI." Figures for advanced economies as well as emerging and
commodityexporting economies are calculated as the weighted averages of the Manufacturing PMI using GDP shares of world total GDP from the IMF as weights. Advanced economies
consist of the United States, the euro area, the United Kingdom, and Japan. Emerging and commodity-exporting economies consist of 17 countries and regions, such as China,
South Korea, Taiwan, Russia, and Brazil.
Sources: CPB Netherlands Bureau for Economic Policy Analysis; IHS Markit (© and database right IHS Markit Ltd 2019. All rights reserved.); IMF, etc. 1
Chart 2
I. Economic Developments
Exports, Production, and Business Sentiment
Exports and Production Business Conditions DI (Tankan)
DI ("favorable" - "unfavorable"), % points
s.a., 2012/Q1=100
25
115
Manufacturing
Real Exports
20
Nonmanufacturing
Production
110
15
10
105
5
0
100
-5
-10
95
-15
90 -20
CY 12 13 14 15 16 17 18 19
CY 12 13 14 15 16 17 18 19
Sources: Ministry of Finance; Ministry of Economy, Trade and Industry; Bank of Japan. 2
Domestic Demand
Business Fixed Investment and
Private Consumption
Corporate Profits
s.a., ann., tril. yen s.a., %
s.a., CY 2011=100
95 7 108
90 6
106
85 5
104
80 4
102
75 3
100
70 2
Private nonresidential investment (SNA, 98
65 1
Consumption Activity Index (travel balance
real, left scale)
adjusted, real)
Ratio of current profits to sales (right scale)
60 0 96
CY
09 10 11 12 13 14 15 16 17 18 19 09 10 11 12 13 14 15 16 17 18 19
CY
Notes: 1. In the left chart, figures for the ratio of current profits to sales are based on the "Financial Statements Statistics of Corporations by Industry, Quarterly." Excluding "finance and
insurance." Figures from 2009/Q2 exclude "pure holding companies."
Notes: 2. In the right chart, figures for the Consumption Activity Index exclude inbound tourism consumption and include outbound tourism consumption.
Sources: Ministry of Finance; Cabinet Office; Bank of Japan, etc. 3
Chart 4
I. Economic Developments
Employment and Income Situation
Labor Market Conditions Employee Income
y/y % chg.
s.a., % s.a., ratio
7 1.8
4
Unemployment rate (left scale)
1.6
2
Active job
6
openings-toapplicants ratio (right scale)
1.4
0
5
1.2
-2
1.0
4
Total cash earnings
-4
Number of employees
0.8
3 Employee income
-6
0.6
2 0.4 -8
CY 04 06 08 10 12 14 16 18 09 10 11 12 13 14 15 16 17 18 19
Note: In the right chart, figures for the employee income, Q1 = March-May, Q2 = June-August, Q3 = September-November, Q4 = December-February. Employee income = total cash
×
earnings ("Monthly Labour Survey") number of employees ("Labour Force Survey"). Figures for the "Monthly Labour Survey" from 2013/Q1 are based on corrected figures
adjusted for establishments in Tokyo with 500 or more employees. Figures from 2016/Q1 are based on continuing observations following the sample revisions of the "Monthly
Labour Survey."
4
Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications.
U.S.-China Trade Friction
U.S. Average Tariffs on China's Average Tariffs on
Chinese Goods U.S. Goods
% %
20 20
4th round (September)
4th round
Rise in tariffs imposed in the 3rd round
Rise in tariffs imposed in the 3rd round
1st-3rd rounds
1st-3rd rounds
15 15 Other
Base tariff rate
Base tariff rate
10
10
5
5
0
0
Start of 2018 average June Sep.
Start of End of May Sep.
2018 2018 2019 2018 2019
Note: Average tariffs are BOJ staff estimates based on such factors as the tariff rates under most-favored-nation treatment at the start of 2018, additional tariffs by goods, and the trade
value between the U.S. and China in 2017.
Sources: Census Bureau; U.S. government; WTO; UN Comtrade; Chinese government; Bown, Chad P. 2019. US-China Trade War: The Guns of August. PIIE Trade and Investment
Policy Watch blog, Peterson Institute for International Economics (August 26).
5
Chart 6
II. Price Developments
Consumer Prices and Output Gap
Consumer Prices Output Gap
%
y/y % chg.
6
4
CPI (all items less fresh food)
Excess demand
CPI (all items less fresh food and energy) 4
3
2
2
0
1
-2
0
-1 -4
-2 -6 Excess supply
-3
-8
CY 85 90 95 00 05 10 15
CY 85 90 95 00 05 10 15
Notes: 1. In the left chart, figures are adjusted for changes in the consumption tax rate.
Notes: 2. In the right chart, figures are based on BOJ staff estimations.
Sources: Ministry of Internal Affairs and Communications; Bank of Japan. 6
Chart 7
II. Price Developments
Situation Surrounding Consumer Prices
Changes in Output Prices (Tankan)
Diffusion Index of Price Changes
DI ("rise" - "fall"), % points % points
10
50
More
price-increasing
5
40
items
0
30
-5 20
-10 10
-15
0
-20
-10
-25 -20
-30 -30
More
price-decreasing
-35 -40
items
-40 -50
CY 05 07 09 11 13 15 17 19 CY 05 07 09 11 13 15 17 19
Note: In the right chart, the diffusion index is defined as the share of price-increasing items minus the share of price-decreasing items. The share of price-increasing/decreasing items
is the share of items in the CPI (less fresh food, consumption tax adjusted) for which price indices increased/decreased from a year earlier.
Sources: Ministry of Internal Affairs and Communications; Bank of Japan.
7
Chart 8
III. The Bank's Conduct of Monetary Policy
Yield Curve Control
%
1.2
Recent
1.0
Average
0.8 Bottom
Target level of the long-term
interest rate:
Peak
around zero percent
0.6
0.4
Short-term policy interest rate:
minus 0.1 percent
0.2
0.0
-0.2
-0.4
-0.6
0 1 2 3 4 5 6 7 8 9 10 15 20 30 40
residual maturity, year
Note: Figures for average, bottom, and peak are of JGB yields since the introduction of yield curve control (Sep. 21, 2016). Those for bottom and peak are of 10-year JGB yields.
Source: Bloomberg. 8