Economic Activity, Prices,
and Monetary Policy in Japan
Speech at a Meeting with Local Leaders in Eastern Hokkaido
(via webcast)
MASAI Takako
Member of the Policy Board
I. Developments in Economic Activity and Prices
I would like to start my speech with a look at developments in economic activity and prices.
Following the discussion at the Monetary Policy Meeting (MPM) held in October 2020, the
Bank of Japan published the Outlook for Economic Activity and Prices, or the Outlook Report.
In this report, the Bank presented its projections for Japan's economic activity and prices from
fiscal 2020 through fiscal 2022.
I will explain developments in economic activity and prices by presenting the main content
of the Outlook Report.
A. Overseas Economies
Let me first touch on the current situation of overseas economies. The Bank assesses that they
have picked up from a state of significant depression.
After hitting bottom this April, when around half of the world's population of 7.8 billion
people were forced to stay at home, global economic growth rebounded to a relatively high
level temporarily in the July-September quarter, mainly reflecting a resumption of economic
activity, the materialization of pent-up demand, and a recovery in production. Indeed, the
Global Purchasing Managers' Index (PMI) for both manufacturing and services for this period
regained the boom-or-bust dividing line of 50. Global production and the world trade volume
also seemed to have picked up.
As for the outlook, with the impact of the novel coronavirus (COVID-19) waning gradually,
overseas economies are likely to improve, partly supported by aggressive macroeconomic
policies taken by each country and region.
That said, it is noteworthy that the recent pace of improvement is uneven across business
sectors and countries. It can be said that there is also a high level of uncertainty regarding this
improvement, given that public health measures have been tightened again, mainly in Europe,
which could temporarily push down economic activity.
By sector, a clear V-shaped recovery has been seen in some, whereas a recovery in demand
is still not in sight in others. I believe this contrast between sectors has started to become
gradually more evident than that observed at the time of the Global Financial Crisis (GFC).
In particular, comparing the impact of COVID-19 on goods and services, that on services has
been conspicuous recently. For example, regarding private consumption in the United States,
consumption of goods such as automobiles and recreational goods (e.g., video game machines
and televisions) is firm due to the materialization of pent-up demand and a shift from demand
for services. On the other hand, weakness in consumption of services is evident, mainly in
face-to-face services, including dining-out, accommodations, and entertainment. This trend
is also observed in China, where economic activity resumed earlier than elsewhere.
The International Monetary Fund (IMF), in the World Economic Outlook released in October
2020, revised upward its projection for global growth for 2020 by 0.8 percentage point, from
minus 5.2 percent to minus 4.4 percent. By country and region, there are variations; while the
estimates for developed economies and China were revised upward, those for emerging
economies, including India, were revised downward. As demand for tourism and travel has
fallen even more steeply compared with other face-to-face services, it is highly likely that the
impact of COVID-19 will be prolonged and the pace of improvement will be only moderate
in countries and regions where travel income has a large share in the economy. Indeed, when
we look at the economic growth estimates in the Autumn 2020 Economic Forecast released
by the European Commission this month, that for the euro area in 2020 turned out to be higher
than that released in the summer, while those for Spain and Malta, where tourism and other
services sectors have large shares, were lower.1
I will touch upon risks brought by this unevenness later.
B. Japan's Economy
1. Current situation
The Bank assesses that Japan's economy has picked up with economic activity resuming,
although it remains in a severe situation due to the impact of COVID-19 at home and abroad.
In the April-June quarter, real GDP recorded a growth rate of minus 8.2 percent on a quarter-
on-quarter basis (minus 28.8 percent on an annualized basis), reflecting sharp declines,
mainly in exports (including inbound tourism consumption, which is classified as services
exports) and private consumption. This was the largest negative growth since 1980, from
when comparable data are available. The first preliminary estimate of the real GDP growth
rate for the July-September quarter, which was released today, is 5.0 percent on a quarter-on-
quarter basis (21.4 percent on an annualized basis).
On the other hand, the impact of COVID-19 remains significant, particularly in face-to-face
services such as dining-out, travel, and entertainment.2 For example, a consumption indicator
based on credit card transaction data indicates that services consumption, compared with
goods consumption, not only registered a sharp decline for the April-May period but also has
seen a marked delay in a subsequent pick-up. In addition, mobility changes based on location
tracking data -- which have a high correlation with selective expenditures for services --
temporarily followed a pick-up trend after the state of emergency was lifted, but the pick-up
leveled off during the summer in reflection of a resurgence in the number of confirmed new
COVID-19 cases. In this respect, the results of a questionnaire survey indicate a cautious
stance on going out or coming in contact with others, mainly among seniors. This is probably
a factor constraining an increase in the pace of recovery in consumption. Moreover, with
regard to inbound tourism demand, which recorded remarkable growth over the past several
years, there continue to be almost no inbound visitors with entry and travel restrictions
remaining in place in order to contain the spread of COVID-19. This, coupled with a decrease
in opportunities for going out because of the expansion in teleworking, has weakened demand
for cosmetics. This is one example of the widespread effects of the pandemic. However, there
have been encouraging developments for face-to-face services, with the government's
demand stimulus measures, such as the "Go To" campaign having been effective. This
includes the "Go To Travel" campaign -- a domestic tourism promotion program -- having
been expanded to include trips to and from Tokyo since October as the spread of COVID-19
has been contained relative to other countries.
2. Outlook
With regard to the outlook, the Bank's baseline scenario is as follows: Japan's economy is
likely to follow an improving trend with economic activity resuming and the impact of
COVID-19 waning gradually, but the pace is expected to be only moderate while vigilance
against COVID-19 continues. Thereafter, as the impact subsides globally, the economy is
projected to keep improving further with overseas economies returning to a steady growth
path.
Looking at details of the outlook for each fiscal year, in the second half of fiscal 2020, with
economic activity resuming and the impact of COVID-19 waning gradually, the economy is
expected to continue picking up, mainly for exports and production, although downward
pressure is expected to remain strong in the services industry in particular. Thereafter, in fiscal
2021, as the impact of COVID-19 wanes at home and abroad and the growth rates of overseas
economies rise, an improving trend in the economy is expected to become evident, partly
supported by accommodative financial conditions. In fiscal 2022, the economy is expected to
continue growing firmly, with demand at home and abroad increasing in a well-balanced
manner. In terms of the medians of the Policy Board members' forecasts in the October 2020
Outlook Report, the real GDP growth rate is minus 5.5 percent for fiscal 2020, 3.6 percent
for fiscal 2021, and 1.6 percent for fiscal 2022.
However, this outlook is based on the assumption that COVID-19 will not spread again on
such a large scale that the wide-ranging public health measures will need to be reinstated. It
also is based on the premises that, while the impact of COVID-19 remains, firms' and
households' medium- to long-term growth expectations will not decline substantially and the
smooth functioning of financial intermediation will be ensured with financial system stability
being maintained. However, the assumption and premises entail high uncertainties. Within
the Bank's baseline scenario, I support the assessment of the current situation but have a
cautious view on the future outlook for the following two reasons.
First, I expect that the world trade volume will continue to grow firmly for the time being. At
the same time, there is high uncertainty as to whether the growth trend will be maintained
through the second half of the projection period given that the rate of increase had been
slowing since around the middle of 2018, before the outbreak of COVID-19, mainly affected
by the U.S.-China trade friction. Indeed, Japan's export and production levels had already
been on a downtrend prior to the outbreak, which I believe warrants attention.
Second, nonmanufacturing industries, mainly the services sector, are projected to recover at
only a moderate pace globally. In this situation, I believe that recovery in the services sector
is indispensable to Japan's economy returning to an expanding trend given that it has provided
substantial support for economic growth over the past several years through business fixed
investment, mainly construction investment, and that it has had a growing presence in Japan's
labor market in recent years.
3. Risks to the outlook
Regarding the outlook for the economy, risks up until the impact of COVID-19 subsides
include the following: (1) the impact of COVID-19 on domestic and overseas economies; (2)
firms' and households' medium- to long-term growth expectations; and (3) developments in
the financial system. Furthermore, attention should continue to be paid to, for example, U.S.-
China tension, the future consequences of the trade negotiations between the United Kingdom
and the European Union, geopolitical risks, and developments in global financial markets
under these circumstances.
The risk that I particularly bear in mind is the potential impact on the global economy of the
uneven recovery, with the pace varying across countries and regions. At present, many
countries and regions have been conducting fiscal and monetary policies in the same direction
in response to the globally common shocks, and this appears to have contributed to the
stability in financial markets thus far. However, as I stated in my earlier overview, a
synchronous global economic recovery comparable to the one in 2017 is unlikely to occur
over the coming years. The expectation is that the process of recovery will be long lasting
and that the pace will vary widely across countries and regions. In my view, it should be noted
that such unevenness could result in differences in policy direction across countries and
regions. In particular, as Gita Gopinath, Director of the Research Department at the IMF, has
pointed out, the shortfall in GDP growth in 2020 to 2021 relative to pre-COVID-19 growth
projections is expected to be larger for emerging and developing economies, except for China,
than that for developed economies. In this situation, it warrants attention that the underlying
trend in international fund flows could change if the recent global convergence in income
level and current account balance turn to divergence once again. In this regard, I believe that
measures to mitigate such risk, including the extension of the Debt Service Suspension
Initiative (DSSI) for developing economies, which was agreed upon at the recent G20
meeting, will become increasingly important in the future.
C. Price Developments
1. Current situation
Next, I will turn to price developments in Japan.
The year-on-year rate of change in the consumer price index (CPI) for all items less fresh
food has decelerated and become slightly negative, mainly due to the impact of COVID-19,
the past decline in crude oil prices, and a decrease in hotel charges that reflects a discount
through the "Go To Travel" campaign. However, the rate of change in the CPI for all items
less fresh food and energy, excluding the effects of temporary factors of the consumption tax
hikes, policies concerning the provision of free education, and the "Go To Travel" campaign,
has been slightly positive recently.
As for the indicators for capturing the underlying trend in the CPI, the rate of change in the
trimmed mean decreased after the turn of the year, reflecting a decline in such items as those
related to energy (electricity as well as manufactured and piped gas charges) and those related
to travel (hotel charges and charges for package tours to overseas), both of which have large
weights in the CPI, and it has been at around 0 percent recently. Regarding the mode, which
is less susceptible to developments in CPI items with large weights, the rate of increase is in
the range of 0.0-0.5 percent.
2. Outlook for prices
With regard to the outlook for prices, the year-on-year rate of change in the CPI for all items
less fresh food is likely to be negative for the time being, mainly affected by COVID-19, the
past decline in crude oil prices, and the "Go To Travel" campaign. Thereafter, it is expected
to turn positive and then increase gradually, since downward pressure on prices is projected
to wane gradually along with economic improvement, and the effects of such factors as the
decline in crude oil prices are likely to dissipate. In terms of the medians of the Policy Board
members' forecasts in the October 2020 Outlook Report, the year-on-year rate of change in
the CPI for all items less fresh food is minus 0.6 percent for fiscal 2020, 0.4 percent for fiscal
2021, and 0.7 percent for fiscal 2022.
3. Risks to prices
Risks specific to prices include (1) uncertainties over firms' price-setting behavior amid the
impact of COVID-19 on both the demand and supply sides of economic activity and (2) future
developments in foreign exchange rates and international commodity prices. I believe that
greater emphasis needs to be placed on both of these risk factors.
Regarding the first risk, it is not assessed at present that price cuts that aim at stimulating
demand have been observed widely, since one of the reasons for the current decrease in
demand due to constrained economic activity is vigilance against COVID-19. However, total
hours worked continue to decrease and the positive effects of the government's provision of
special cash payments on disposable income have gradually dissipated. If the employment
and income situation of households becomes more severe, this could affect firms' price-
setting behavior. I will therefore closely monitor future developments. With regard to the
second risk, global financial markets are still nervous with the outlook for economic activity
being unclear, although tension has eased. I therefore find it necessary to remain vigilant with
regard to the extent to which these developments will spread to import prices and domestic
prices.
II. The Bank's Monetary Policy
Next, I will talk about the Bank's monetary policy.
A. The Current Conduct of Monetary Policy
From late February through March 2020, when the effects of the spread of COVID-19 began
to materialize, growing uncertainties over the global economy brought about developments
including the following. Investors' risk sentiment deteriorated rapidly in global financial and
capital markets, and stock prices worldwide plunged, including in Japan, with their volatility
increasing to a level observed for the first time since the GFC. Long-term interest rates also
temporarily declined substantially, with those in the United States and Germany reaching
historically low levels. The commodity market was another such example, where prices such
as of crude oil and copper declined significantly. As these developments suggest, global
financial and capital markets remained unstable during this time as the effects of the sudden
market turmoil became widespread.
Meanwhile, financial conditions rapidly became less accommodative worldwide, to the
extent that the U.S. Federal Reserve inevitably implemented successive measures in response,
such as unlimited purchases of U.S. government bonds and purchases of CP and corporate
bonds. Particularly in the case of Japan, firms -- ranging from large firms to small and
medium-sized as well as micro firms -- suffered a rapid worsening of business conditions due
to the spread of COVID-19, which happened to coincide with the end of their accounting
period at end-March. In my view, this was cause for concern that these firms might not be
sufficiently prepared to deal with the given situation. Indeed, there was a risk that corporate
financing in Japan would be under a significant amount of stress in the form of, for example,
an expansion of issuance spreads for CP and corporate bonds.
Given these circumstances, the Bank brought forward the MPM scheduled for March, at
which time it decided to enhance monetary easing with a view to doing its utmost to ensure
smooth corporate financing and to maintaining stability in financial markets. At a subsequent
MPM in April and an unscheduled one in May, it introduced measures to further enhance
monetary easing. Such swift and aggressive measures by the Bank effectively draw on lessons
learned from its experiences during the GFC.
The Bank has implemented the following three measures to enhance monetary easing in
response to the current phase. First, it introduced the Special Program to Support Financing
in Response to the Novel Coronavirus (COVID-19) in order to support financing, mainly of
firms. The total size of this program exceeds 140 trillion yen. Specifically, the program
consists of (1) purchase of CP and corporate bonds with an upper limit of about 20 trillion
yen and (2) the Special Funds-Supplying Operations to Facilitate Financing in Response to
the Novel Coronavirus (COVID-19), which will be about 120 trillion yen at maximum.
Through the special operations, the Bank provides funds on favorable terms to financial
institutions that make loans in response to COVID-19. The operations also are applied to
loans for which the government takes the credit risk. This therefore represents a case of
cooperation between the Bank and the government to support financing, mainly of firms.
Second, to maintain stability in financial markets, the Bank has adopted a framework through
which ample yen and foreign currency funds can be provided in a flexible manner. As for the
yen funds, under yield curve control, the Bank decided to purchase a necessary amount of
Japanese government bonds (JGBs) without setting an upper limit. Regarding foreign
currency funds, the Bank has provided ample U.S. dollar funds through U.S. dollar funds-
supplying operations, strengthened based on the cooperation of six major central banks
including the Bank of Japan.
Third, the Bank has actively purchased exchange-traded funds (ETFs) and Japan real estate
investment trusts (J-REITs) with the purpose of lowering risk premia in asset markets. The
aim of this measure is to prevent firms' and households' sentiment from deteriorating through
volatility in asset markets and supporting positive economic activity.
In addition to these three measures, the Bank has made regulatory responses to ensure
financial system stability, including an easing of the leverage ratio requirement it announced
with the Financial Services Agency in April. It can be assessed that such responses have
produced the intended effects so far; for example, avoiding the kind of significant tightening
of financial conditions that initially had been anticipated.
Next, I would like to mention two points that I bore in mind in the process leading up to the
Bank's series of policy decisions. The first is the importance of maintaining accommodative
financial conditions, mainly through the provision of ample funds. For example, if the
issuance market mainly for CP and corporate bonds were to dry up, as was the case at the
time of the GFC, firms might rush to banks to take out large-lot loans, a situation that could
result in a further credit contraction. In addition, even though it can be said that financial
institutions have significantly increased their robustness compared with the time of the crisis,
instability in financial markets will have a considerable impact on their stance on credit
provision. I assume that many still vividly recall the experience following the GFC, in which
a serious delay was caused in the issuance of letters of credit on international shipments of
goods.
The second point is the importance of maintaining firms' and households' sentiment and
providing financial support to small and medium-sized firms as well as micro firms with a
sense of urgency, given that the impact of COVID-19 has sent rapid, enormous shockwaves
through a broad range of corporate activities regardless of firm size or business sector. In
terms of the former, it is important for the Bank to clarify its policy stance, as uncertainty
about future developments is extremely high. Thus, the Bank has changed its forward
guidance for policy rates to one stating that it "will closely monitor the impact of COVID-19
and will not hesitate to take additional easing measures if necessary" from the previous one
stating that it "will not hesitate to take additional easing measures if there is a greater
possibility that the momentum toward achieving the price stability target will be lost."
Regarding the latter, I believe top priority should be placed on taking measures to support
financial and economic activities, including coordinated actions with the government and
overseas central banks.
B. Future Conduct of Monetary Policy
Since April 2013, the Bank has implemented Quantitative and Qualitative Monetary Easing
with the aim of achieving the price stability target of 2 percent at the earliest possible time.
As a result, it can be said that Japan's economy is no longer in deflation in the sense of a
sustained decline in prices. Even so, the January 2020 Outlook Report, which was released
immediately before the outbreak of COVID-19, assessed that "the momentum toward
achieving the price stability target of 2 percent is maintained but is not yet sufficiently firm,
and thus developments in prices continue to warrant careful attention." As this suggests, the
path toward achieving the price stability target was not expected to be easy even without
COVID-19. The impact of the pandemic added to the difficulty, causing the inflation
momentum to be lost temporarily.
Given the impact of COVID-19, it is likely for the time being that the output gap, an indicator
of labor and capacity utilization, will remain rather deep in negative territory and the pace of
its improvement will be moderate. It also is likely to take time before medium- to long-term
inflation expectations, which are weakening somewhat at present, start to rise again.
Therefore, I consider it necessary to be strongly aware of the possibility that it will take more
time to achieve the price stability target.
In light of these points, it is necessary to assume that monetary easing will be prolonged
further. In other words, monetary policy should be conducted while taking into account such
prolongation. Specifically, I expect that it will become crucial to give more consideration to
the side effects of prolonged monetary easing and to take policy responses from a broader
perspective in order to ensure the sustainability of the policy.
For example, regarding ETF purchases, the Bank aims to bring about positive effects to the
economy and prices by lowering risk premia in the stock market. However, it is also true that
10 years since the introduction of the purchase program, the amount outstanding of ETFs held
by the Bank has increased to a considerable extent. In this situation, in July 2018, the Bank,
with a view to persistently continuing with powerful monetary easing, shifted to a flexible
purchasing method for ETFs under which it may increase or decrease the amount of purchases
depending on market conditions. The Bank has also introduced an ETF lending facility with
the aim of improving the liquidity in domestic ETF markets. I believe that it will become
increasingly important to discuss how to maintain the effects of monetary easing while
ensuring the sustainability of the policy, including in terms of increasing flexibility in ETF
purchases and developing the market further.
III. Toward Sustainable Economic Growth
More than four years have passed since I joined the Bank's Policy Board. I feel that the paces
of technological development and changes in social norms have accelerated over this period.
Moreover, the global spread of COVID-19 is rapidly changing people's behavioral patterns.
In particular, in the United States and Europe, where the spread has been severe, various
organizations and individuals seem to be accumulating new experiences, an example being
that the U.S. Federal Reserve's policy decisions since the outbreak have principally been
made via remote work.
In order for Japan to ensure sustainable economic growth in this situation, it is becoming
increasingly important to move in step with these global developments. In what follows, let
me introduce the Bank of Japan's initiatives in this regard based on the two points that I
consider important.
A. Sustainable Development Goals (SDGs) and Environmental, Social, and Governance
(ESG) Factors
First, both the public and private sectors have stepped up their efforts toward achieving the
SDGs to realize sustainable economic growth since the United Nations adopted the 2030
Agenda for Sustainable Development in September 2015.3 The Japanese government has
announced its aim to reduce greenhouse gas emissions to virtually net-zero by 2050. From
the perspective of contributing to financial system stability, which is the central bank's
mission, climate change has been drawing global attention, and many central banks and
supervisors are strengthening activities in line with this trend. For example, in December
2017, the Network for Greening the Financial System was established. This is a group of
willing central banks and supervisors, joined by the Bank of Japan in November 2019. As
discussion on climate-related risks focuses mainly on matters with a medium- to long-term
horizon, I do not view that these risks will pose an immediate threat to financial stability.
However, it is important to actively participate in and contribute to international discussions
and communicate necessary information in a timely manner while keeping abreast of
viewpoints in the international community.
To support firms proactively investing in physical and human capital, the Bank has been
purchasing ETFs comprised of such firms' stocks at an annual pace of about 300 billion yen.
In addition, it provides funds to support private financial institutions' efforts in strengthening
the foundations for Japan's economic growth (Fund-Provisioning Measure to Support
Strengthening the Foundations for Economic Growth). The Bank does not consider these
measures as an inducement for ESG finance. However, I hope that capital market participants
will develop further interest in firms that are proactively engaging in ESG-related activities
through, for example, investment in physical and human capital, amid the Bank's
implementation of such initiatives.
B. Digital Transformation (DX)
Second, it is also important to take advantage of DX development, which has been making
significant progress in recent years, to pave the way for sustainable economic growth. There
is no doubt that the increased need for non-face-to-face or no-contact interactions due to the
spread of COVID-19 has accelerated DX development. This could in turn bring wide-ranging
economic and social benefits through not only greater efficiency but also higher value-added
services and the creation of new services. In order to maximize the benefits of digital
technology while fully guarding against cybersecurity risk, which is the greatest threat to the
digital world, it is becoming increasingly important for the public and private sectors to
cooperate in further improving the DX environment.
Against this background, the Bank announced its approach to Central Bank Digital Currency
in October 2020. Considering that digitalization has advanced in various areas at home and
abroad on the back of rapid development of information communication technology, it is
important for a central bank to make necessary preparations such as conducting experiments
and exploring institutional arrangements. I hope that such activities, coupled with resourceful
initiatives by private-sector business entities, will lead to the development of safe and
efficient payment and settlement infrastructures suited for a digital society.
It is expected that Japan's overall productivity will improve through efforts related to SDGs,
ESG factors, and DX. I believe that this will lead to sustainable economic growth, thus
helping the Bank to eventually achieve its price stability target. However, I think that the road
ahead is in no way smooth. Therefore, it can be said that this is the critical juncture at which
the Bank firmly supports the efforts of each economic entity through monetary policy and
actively provides support for financial institutions' initiatives from the viewpoint of
contributing to financial system stability.