Ryuzo Miyao: Economic activity, prices, and monetary policy
Speech by Mr Ryuzo Miyao, Member of the Policy Board of the Bank of Japan, at a meeting
with business leaders, Chiba, 28 March 2012.
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Introduction
Thank you for giving me this opportunity to exchange views with people representing Chiba
Prefecture. Allow me to express also my gratitude for your cooperation with the activities of
the Research and Statistics Department and other departments of the Bank of Japan.
I have been told that the Bank's meetings with business leaders have not been held in Chiba
since October 2003, and thus I am looking forward to hearing your views. In my speech to
you today, I will review economic activity and prices both overseas and in Japan - whose
economy is heading toward recovery despite the effects of the global economic
slowdown - and then present a few remarks on monetary policy. My concluding remarks will
touch on the economy of Chiba Prefecture.
I. Recent developments in economic activity and prices
A. Overview
Japan's economy entered a soft patch around the turn of the year. While domestic demand
has been firm, growth in external demand has been sluggish, reflecting the deceleration of
the global economy - caused by the European economy's stagnation due to the European
debt problem, a slowdown in the Chinese economy due to monetary tightening, and the
flooding in Thailand - as well as the continued appreciation of the yen. As a result, Japan's
economic activity as a whole has remained more or less flat.
However, it is expected that the pace of recovery in overseas economies will pick up slowly,
led by emerging economies, and reconstruction-related demand after the Great East Japan
Earthquake in March 2011 will gradually increase. Supported by these factors, Japan's
economy is expected to gradually emerge from its soft patch and return to a moderate
recovery path.
In what follows, I will present an overview of developments in overseas economies, and then
discuss the current situation and prospects for Japan's economy.
B. Overseas economies
The European economy experienced severe strains in the financial markets and financial
systems until around the end of 2011, because of the European debt problem. However,
market conditions subsequently improved with the subsiding of tail risks such as the funding
collapse at financial institutions. This positive development was partly the result of a
reduction in the pricing on the existing temporary U.S. dollar funds-supplying operations by
six central banks and 36-month longer-term refinancing operations (LTROs) with full
allotment conducted twice by the European Central Bank. In particular, approximately
500 billion euros on a net basis were provided through each tranche of the LTROs, which
facilitated the smooth redemption of corporate bonds and reduced the yields on government
bonds through their purchase by financial institutions. With the recovery of stability in
financial markets and financial systems, some financial institutions have begun issuing
uncollateralized corporate bonds, and the situation has been steadily improving. In
mid-March, debt restructuring with Greek government bondholders in the private sector was
carried out successfully and the second tranche of financial assistance under the economic
adjustment programme for Greece was agreed. The risk of anxiety sweeping through
financial markets or rapid economic deterioration - which had been acknowledged in the
phrase "Europe is the greatest risk" - thus appears to have been alleviated.
Nevertheless, the European debt problem itself has not been resolved, and concern over
deleveraging - whereby financial institutions reduce lending and adversely affect economic
activity - has yet to be dispelled. European financial institutions appear to be reducing their
foreign currency-denominated lending, such as syndicated loans, in North and South
America and Asia. It has been reported that these institutions have also been gradually
reducing euro-denominated lending, particularly in some European peripheral countries. In
the background, it seems that two factors are at work, namely, sluggish demand for funds by
firms and households due to the economic downturn, and the need of financial institutions to
improve their capital ratios. Future developments in both factors continue to require attention.
More fundamentally, Europe faces the critical challenge of pursuing both fiscal consolidation
and structural reform at the same time and raising growth potential. The difficulty for the
European countries is that they must pursue fiscal consolidation in the short run but at the
same time boost private-sector vitality and enhance economic growth, while preventing fiscal
consolidation from further harming economic activity. The European economy as a whole is
likely to stagnate for the time being and subsequently return to a moderate recovery path.
Given that disparities in competitiveness are becoming apparent among European countries,
it is possible that the pace of recovery will be extremely slow. Due attention should continue
to be paid to the risk that economic stagnation might become chronic or prolonged.
As for the United States, several favorable economic indicators have been released recently
and the economy is recovering moderately. The year-on-year rate of change in the consumer
price index (CPI) for all items less food and energy has been stable at about 2 percent. The
general picture of the economy is that households' balance-sheet adjustments continue to
weigh on economic activity, but the mechanism of economic recovery supported by the
corporate sector is operating continuously and the momentum for a moderate improvement
is being maintained.
Let me elaborate on this point for a moment. In the United States, housing prices have been
sluggish, but firms' production, exports, and profits have been strong because they have
succeeded in tapping global demand, and this has led to an improvement in employment and
income conditions and steadily underpinned private consumption. Gradual materialization of
pent-up demand, or potential demand, which had been contained after the Lehman shock
and the Great East Japan Earthquake, seems to have also supported the economic
recovery. Another advantage is the fact that spill-over effects of the European debt problem
on economic activity have thus far been less serious than initially expected.
As for the outlook for the U.S. economy, a number of private research agencies hold the view
that moderate growth of 2.0-3.0 percent is achievable. Given that housing construction and
house sales are showing signs of bottoming out against the background of a solid expansion
in employment and a gradual reduction in the ratio of household debt to disposable income, it
appears that the burden of households' balance-sheet adjustments is gradually easing as a
whole and the economy is gradually increasing in resilience to downside shocks.
Having said that, as a current risk to the U.S. economy I would point to the surge in gasoline
prices stemming from an increase in crude oil prices. Thus far, the rise in crude oil prices is
considered to be largely attributable to supply-side factors, including the situation in Iran, and
thus the price hike is likely to be temporary. As natural gas prices have been declining in the
United States due partly to progress in shale gas development, we might not need to be
overly concerned about the rise in crude oil prices. However, if gasoline prices - which at
present are 3.8 U.S. dollars per gallon - exceed 4 U.S. dollars, this is likely to adversely
affect economic activity, mainly in the form of its impact on medium- to low-income families,
and thus the situation warrants attention.
In the meantime, stock prices have recovered to their level prior to the Lehman shock and
developments in U.S. financial markets have been favorable. Although long-term interest
rates have not moved in tandem with the rise in stock prices and have been more or less flat
for some time, they have started to rise recently, gradually reflecting the improvement in
economic activity.
Asian emerging economies, led by China, have been maintaining high growth rates, and
medium- to long-term growth expectations also appear to be high. In China, however,
exports and imports declined and the pace of increase in production slowed around the turn
of the year, due to the effects of monetary tightening to contain the rise in prices as well as to
stagnation in the European economies associated with the debt problem. Consequently,
exports have declined and the economies of the NIEs and the ASEAN countries have
decelerated somewhat as well.
Asian emerging economies are leading the global economy, and the Bank's baseline
scenario is that these economies will gradually recover, supported by buoyant domestic
demand. At the same time, attention should be paid to the possibility that European financial
institutions' credit contraction will spill over to trade credits and prolong the current economic
slowdown. In terms of achieving sound development of the global economy in the longer
term, a key factor will be how to maintain the balance between economic growth and price
stability. In this regard, China's announcement that lowered the economic growth target from
8.0 percent in 2011 to 7.5 percent in 2012 was a favorable step toward achieving a soft
landing of the economy, despite the weakened economic stimulus effect in the short term. At
any rate, in 2012 uncertainty and changes in economic policy associated with the transition
of leadership in China should be carefully monitored.
C. Economic activity and prices in Japan
One year has passed since Japan's economy experienced the Great East Japan
Earthquake. Following the disaster, economic activity plunged due to the disruption of supply
chains and constraints on electric power supply. Thereafter, as a result of strenuous efforts
by the parties concerned, Japan's economy began to recover in the July-September quarter
of 2011. However, in the October-December quarter, the economy faced downward pressure
as exports and production grew at a sluggish pace due to a slowdown in overseas
economies - on the back of the European debt problem, monetary tightening in China, and
the flooding in Thailand - as well as the appreciation of the yen. The annualized
quarter-on-quarter growth rate of real GDP on a seasonally adjusted basis in 2011 was
minus 6.9 percent in the January-March quarter, minus 1.2 percent in the April-June quarter,
7.1 percent in the July-September quarter, and minus 0.7 percent in the October-December
quarter.
In recent months, exports and production have remained more or less flat, but domestic
demand has been solid. Business fixed investment has been on an increasing trend, albeit
moderately, supported by the restoration of disaster-stricken facilities, and private
consumption has firmed up due in part to the effects of measures to stimulate demand for
automobiles. Housing investment has generally been picking up and public investment has
stopped declining. Household and business sentiment appears to have stopped deteriorating
in general. Thus, although the Bank judged that Japan's economic activity has remained
more or less flat, it has shown some signs of picking up.
With regard to the outlook, the baseline scenario is that Japan's economy is expected to
gradually emerge from the current phase of flat growth and return to a moderate recovery
path as the pace of recovery in overseas economies picks up, led by emerging and
commodity-exporting economies, and reconstruction-related demand gradually increases. It
is desirable for such improvement to be as sustainable as possible.
From the viewpoint of achieving sustainable growth, it is desirable if, both in manufacturing
and nonmanufacturing industries, high-quality capital that enhances value-added is
accumulated domestically, investment increases, and the competitiveness of industries
improves. It is important to maintain and enhance in the domestic economy the qualities
necessary for manufacturing, while working to tap domestic demand that reflects the needs
of the aging population.
Looking at developments in domestic private business fixed investment, we can see that it
declined substantially after the Lehman shock and the ensuing pace of its recovery has been
quite modest. The slowdown in overseas economies and the appreciation of the yen in the
second half of 2011 might have put additional downward pressure on business fixed
investment in the manufacturing industry. According to the Cabinet Office's "Annual Survey
of Corporate Behavior in FY2011," however, firms are forecasting an annual growth rate of
about 1.5 percent in real GDP and about 4 percent in business fixed investment for the next
three years, which suggests that as a whole firms' medium- to long-term growth expectations
have been maintained and their investment appetite has not declined. In the survey, firms'
overseas production ratio is currently about 18 percent and is forecast to reach
approximately 22 percent in five years, which suggests that the balance between overseas
and domestic production will be maintained. In addition, as investment was reduced to the
level below depreciation following the Lehman shock, this in turn is currently encouraging
replacement investment. It can also be expected that firms will add investment spending to
restore and reconstruct disaster-stricken facilities as well as to strengthen their earthquake
resistance.
Given the situation I have described, it would be no surprise if domestic business fixed
investment, compared with firms' cash flows or depreciation costs, became more apparent,
and thus potential demand for investment is likely to have accumulated accordingly. If actual
investment has been contained even though firms' investment appetite has not declined, this
might mean that firms have been deferring investment decisions because of sluggish stock
prices, the yen's appreciation, the slowdown in the global economy stemming from the
European debt problem, and related uncertainty about the future.
Let me repeat that firms' forward-looking investment in projects that would enhance
value-added is a major driving force in order to increase the growth potential of the economy
and improve productivity. It would also contribute to overcoming deflation. Whether firms'
investment spending will steadily increase - at a pace consistent with their growth
expectations, both at home and abroad, in a balanced manner - is vital for Japan's economy
to achieve sustainable growth and overcome deflation.
Turning to price developments, the year-on-year rate of decline in the CPI (all items less
fresh food) slowed at a moderate pace in 2011, reflecting the improvement in the aggregate
supply and demand balance, and has been hovering around 0 percent since the summer of
2011. The baseline scenario of the outlook for prices projects that the current situation is
likely to continue for the time being, but the year-on-year rate of change in the CPI will
gradually turn positive as the aggregate supply and demand balance improves.
While crude oil prices have recently been surging due partly to the situation in Iran, the price
levels of other commodities have not necessarily risen compared with 2011. As this seems to
be consistent with the currently still-weak recovery of the global economy, upward pressure
on crude oil prices might be temporary due to supply-side factors. Since crude oil prices
might remain high depending on developments in geopolitical risk, careful monitoring is
required.
II. Monetary policy
A. Conduct of monetary policy
Let me now discuss the Bank's enhancement of monetary easing decided in February 2012.
At the Monetary Policy Meeting held on February 13 and 14, the Bank - amid the continued
high uncertainty surrounding economic developments both at home and abroad - judged it
necessary to further support the recent positive developments from the financial side and
better ensure the economy's return to a moderate recovery path. Accordingly, the Bank
decided to introduce "the price stability goal in the medium to long term," clarify its monetary
easing stance, and increase the total size of the Asset Purchase Program (hereafter the
Program). In this regard, let me mention three points.
First, the introduction of "the price stability goal in the medium to long term." Prior to the
introduction, the Bank had shown the range of inflation rates that each of the nine Policy
Board members understood as price stability in the form of the "understanding of medium- to
long-term price stability." At the Monetary Policy Meeting in February, the Bank replaced this
to show the Bank's own judgment. Namely, it judges "the price stability goal in the medium to
long term" to be within a positive range of 2 percent or lower in terms of the year-on-year rate
of change in the CPI, and has set the goal at 1 percent for the time being.
Second, the clarification of the Bank's monetary easing stance. Based on the
aforementioned goal, the Bank further clarified its powerful easing stance by clearly stating
that, for the time being, it will continue to pursue powerful monetary easing by conducting its
virtually zero interest rate policy and by purchasing financial assets, with the aim of achieving
the goal of 1 percent in terms of the year-on-year rate of increase in the CPI, until it judges
that the 1 percent goal is in sight.
Third, the increase in the total size of the Program. The Bank increased the purchase of
Japanese government bonds (JGBs) through the Program by about 10 trillion yen, thereby
increasing the total size of the Program from 55 trillion yen to 65 trillion yen. This
demonstrates the clarification of the Bank's monetary easing stance in the form of action.
B. Channels through which the enhancement of monetary easing should lead to
the overcoming of deflation
Based on the decisions I have just mentioned, let me now consider the channels through
which deflation can be overcome. With regard to the transmission channels for the effects of
unconventional monetary policy under the zero interest rate policy, enhancing monetary
easing - by committing to continue the virtually zero interest rate policy into the future and by
increasing asset purchases - would induce a decline in longer-term interest rates and risk
premiums through both the interest rate channel and the portfolio channel. The declines
would influence firms' borrowing costs, a range of asset prices including stock prices and
foreign exchange rates, and bank lending, thereby influencing households' and firms'
spending and eventually have positive effects on economic activity and prices.
Looking at the developments following the February decision based on this consideration - in
the form of effects on longer-term interest rates and people's risk-taking appetite brought
about by prospects, that is, valid expectations for future aggressive monetary policy conduct
- the 2-year government bond yield has declined, the yen has depreciated, and stock prices
have risen. The depreciating trend of the yen and the rise in stock prices were already
evident prior to the February decision, reflecting the mitigation of global risk aversion,
improvement in the U.S. economy, and Japan's trade deficit. The decision at the Monetary
Policy Meeting in February also appears to have contributed to establishing the trend. The
clarification of the Bank's powerful monetary easing stance and decisive policy action seem
to have exerted a strong commitment effect and a policy duration effect. These spilled over
and lowered longer-term interest rates - including the 5-year government bond yield
- enhanced people's risk-taking appetite - lowering required risk premiums in turn - and
thereby enhanced the effects to improve financial conditions.
I pointed out earlier that firms' investment spending might have been restrained due to
sluggish stock prices, the appreciation of the yen, and the slowdown in the global economy.
If the current improving trend in financial conditions continues in tandem with the
improvement in overseas economies, these improvements could induce a favorable turn in
corporate profits and business sentiment, increase forward-looking investment, and
concurrently enhance growth potential and value creativity. The depreciation of the yen and
the rise in stock prices might also lead to an improvement in consumer sentiment and an
increase in tourists from abroad, thereby further stimulating domestic demand. Such
developments would likely work to induce a sustainable economic recovery and a moderate
rise in prices. As cautious views remain with regard to future uncertainties, the headwind
Japan's economy faces is likely to continue. Nevertheless, what I have just discussed
suggests one channel through which powerful monetary easing could lead to overcoming
deflation.
If the path of improvement induced by powerful monetary easing can be forecast and
grasped by market participants, the improvement in financial conditions thus far will not be
short-lived but might reflect trends and sustainable movement consistent with economic
fundamentals. The movements of financial indicators actually observed reflect a mixture of
the effects of various short-term factors and underlying factors. While it is difficult to clearly
distinguish between the two types of factors, we cannot rule out the possibility that further
enhancement of monetary easing has been supporting the desirable trend.
C. The need to strengthen growth potential
In the policy decision made at the Monetary Policy Meeting held on February 13 and 14,
2012, the Bank clarified its commitment to aim at achieving 1 percent inflation and continue
pursuing powerful monetary easing until it judged that the 1 percent goal was in sight.
Further clarification of the commitment has the key merit of reducing forecasting
uncertainties and further enhancing the credibility of monetary policy conduct. Having said
that, however, if policy is conducted in a manner "only to achieve 1 percent inflation at any
cost," it would be too rigid and would not be desirable for the sound development of the
national economy. Overcoming deflation is an overriding issue and needs to be supported
from the financial front. To this end, it is necessary for policy conduct to combine credibility
and flexibility.
In pursing aggressive monetary easing going forward, one of the necessary flexibilities is
proper attention to potential side effects.
The Bank's purchases of JGBs within the framework of the Program are monetary policy
measures that have been judged necessary to overcome deflation, and are not conducted
with the aim of financing the fiscal deficit. At the same time, Japan's enormous fiscal deficit
and government debt outstanding are significant concerns that could elevate fiscal risk. A
rise in government bonds' risk premiums and an increase in interest rates, in the absence of
an economic recovery and a rise in stock prices, would indicate an unfavorable rise in
interest rates. The manifestation of such fiscal risk must be avoided by all means.
To this end, first of all, medium- to long-term fiscal discipline must be ensured. Even if a
central bank implements aggressive asset purchases and government bond purchases to
overcome deflation, this could increase the probability of "unintended consequences" from
fiscal risk manifestation unless key fiscal discipline is ensured.
Furthermore, I believe it is important for Japanese people to make efforts steadily to increase
Japan's growth potential. If firms and households rein in such efforts because uncertainties
regarding the outlook are not dispelled, the crucial growth potential will not increase.
Focusing on savings without carrying out forward-looking investment might induce a
substantial decline in growth potential and, as a result, larger negative impact on public
finance, including a decline in tax revenue.
Confidence in government bonds is sometimes considered from the viewpoint of confidence
in Japan's economy as a whole, by focusing on the current account balance and net external
assets. There is a view that, as long as the trend of current account surplus is maintained,
Japan can continue to accumulate net external assets, which currently total about
250 trillion yen. Therefore, for Japan's economy as a whole, including the corporate and
household sectors, confidence has been maintained and net external assets will serve as a
cushion against fiscal risk. In the sense that the current account surplus and net external
assets might be factors inducing the yen's appreciation, these might contain to some extent
the risks of a one-sided depreciation of the yen and capital flight. However, there is no simple
one-to-one relationship between confidence in fiscal sustainability and the current account
balance or the external position. In order to maintain confidence in fiscal sustainability,
therefore, I believe it is ultimately necessary to ensure fiscal discipline and increase Japan's
growth potential.
In order to increase growth potential, a reasonable amount of time is required to implement
measures, including economic and fiscal structural reforms. This should be obvious even
without reference to the example of Europe. On the relation between monetary policy and
fiscal reform, there are views on one hand that fiscal structural reform cannot be promoted
unless deflation is first overcome and, on the other, that further monetary easing
- particularly purchases of government bonds - should be restrained unless fiscal structural
reform progresses. I support neither of these views. Aggressive efforts from the financial side
to overcome deflation, fiscal structural reform, and efforts to increase growth potential should
all be carried out at the same time by the public as a whole, from the respective standpoint of
each individual.
As for the Bank's policy taken to strengthen growth potential, the Bank has been
implementing the "fund-provisioning measure to support strengthening the foundations for
economic growth," and has been supporting financial institutions' efforts in this regard. At the
Monetary Policy Meeting held on March 12 and 13, 2012, with a view to enhance support by
broadening the base for the efforts, the Bank decided on the following measures. First, the
Bank extended the deadline for applications for new loans by two years, to March 31, 2014.
Second, it established a new arrangement for loans of 500 billion yen for small-lot
investments and loans (1 million yen or more but less than 10 million yen). Third, the Bank
raised the ceiling for the outstanding balance of loans under the existing arrangement from
3 trillion yen to 3.5 trillion yen. And fourth, with a view to support financial institutions' efforts
also from the side of foreign currency funds provisioning, the Bank established a new
arrangement for providing loans in U.S. dollars to the equivalent of 1 trillion yen, using the
U.S. dollar reserves held by the Bank. Details of the measures will be examined at the next
Monetary Policy Meeting to be held on April 9 and 10, 2012. As a result of the measures, the
outstanding balance of loans under the arrangements will increase from 3.5 trillion yen to
5.5 trillion yen.
Up to now, I have described the Bank's efforts to overcome deflation and discussed things to
keep in mind by focusing on the policy decisions made recently. In the actual conduct of
monetary policy, based on the outlook for economic activity and prices, it is necessary to
respond carefully and decisively by identifying the timing and measures while monitoring a
range of conditions and possibilities. The Bank will continue to do its utmost as the central
bank by pursuing powerful monetary easing to overcome deflation, ensure financial market
stability, and provide support to strengthen the foundations for economic growth.
Concluding remarks: the economy of Chiba prefecture
In my conclusion, let me touch on the economy of Chiba Prefecture.
The Great East Japan Earthquake in March 2011 caused tremendous damage to the region,
including fires, tsunami, and soil liquefaction. One year has passed since the disaster
occurred. Let me express once again my heartfelt condolences to the victims of the disaster
and their families. I also salute the local citizens, firms, and governments for their efforts to
achieve restoration and reconstruction.
Chiba Prefecture is bounded by water on three sides, and it is blessed with mild weather and
rich natural surroundings. It has a strong agricultural sector with an array of crops that rank
first nationwide in terms of output, including peanuts, Japanese radishes, green soybeans,
and Japanese pears, and its agricultural output as a whole ranks third in the nation. Chiba
Prefecture also ranks high in terms of fisheries, with plenty of fishing ports, including the
nation's largest, in the city of Choshi. The coastal area contains the Keiyo industrial zone,
which serves as the nation's largest supply depot for raw materials and energy, such as
chemical products, steel, and oil. More than six million people live in Chiba Prefecture, which
also serves as a bedroom community in the Tokyo metropolitan area, and the many
commercial and recreational facilities attract numerous visitors from other prefectures. Such
diversity, offering something for everyone, is a key characteristic and strength of Chiba
Prefecture.
Chiba also contains historic tourism resources including Narita-san, a Buddhist temple that
has been a popular tourist attraction since the Edo Period. A number of efforts have been
made to promote Chiba's attractions to people both within and outside the prefecture. The
Chiba Aqualine Marathon, the first full marathon ever routed on an expressway over the sea,
will be held this October, and a model cycling course has been set up to popularize cycling
tourism. Other promising steps in the prefecture include an expansion of the number of
annual departure and arrival slots as well as the introduction of low-cost air carrier service at
Narita International Airport, which should boost exchanges with other regions.
I trust that Chiba Prefecture will develop even further through people's efforts to maximize
the diverse strengths of their region.