haruhiko kuroda : some reflections on unemployment and inflation speech by mr haruhiko kuroda, governor of the bank of japan, at the ecb forum on central banking, sintra, portugal, 23 may 2015. * * * the accompanying graph can be found at the end of the speech. it is a great pleasure for me to be able to participate in this conference. more than 40 years ago, in his seminal speech on the subject, james tobin said, “ unemployment and inflation still preoccupy and perplex economists, statesmen, journalists, house - wives and everyone else. ” 1 for the bank of japan, employment is not explicitly included in its monetary policy mandate, unlike in the case of the federal reserve. unemployment is still a useful guide for us, however, in pursuing price stability, the explicit mandate of our monetary policy. in addition, it is widely recognized that price stability must be secured because it is an indispensable foundation for the health of the economy, which of course has a direct impact on workers. therefore, despite some seeming differences in the mandates written in their respective statutes, there is little practical difference between major central banks across jurisdictions, in that both unemployment and inflation are of central concern in formulating their monetary policies. nevertheless, there are remarkable differences between the united states, the euro area and japan in their historical observations of unemployment and inflation. let us take a look at this very simple graph : a scattered diagram showing unemployment and inflation for these three jurisdictions. the horizontal axis is unemployment rate, and the vertical one is inflation rate. there are two approaches regarding how to interpret this graph. one approach is to focus on where each cluster of dots is located. there is a well - known measure of welfare, the misery index, which is the simple sum of unemployment rate and inflation rate. if the misery index is indeed the most accurate measure of welfare, the further northeast an economy is located, the more miserable the state of that economy is. in this interpretation, japan ’ s performance has been consistently outstanding for many years with the lowest unemployment and lowest inflation among the three. 2 however, the misery index is an indicator that makes sense only in a high inflation environment, which has not been the case in major economies for the last twenty years. therefore, the misery index would not in fact give us any useful hints in evaluating the monetary policies of major central banks. the other approach is to interpret the clusters as each jurisdiction ’

in oil prices. there have been a number of positive signs in this regard : first, various surveys indicate that inflation expectations have been edging up steadily over the last two years or so. second, annual spring wage negotiations appear to have started reflecting higher inflation expectations : base pay levels rose last year for the first time since the 1990s, and further accelerated this year. third, the bank ’ s economists recently confirmed, based on a rigorous quantitative analysis, that a “ regime - shift ” in trend inflation from zero to a meaningful positive level indeed occurred under qqe. 4 all these signs indicate that we are now overcoming the deflation that has long been afflicting our economy. we must maintain our current efforts in order to achieve the 2 percent inflation target at the earliest possible time, which we now expect to be around the first half of fiscal 2016. another interesting fact illustrated by the graph is that the recent unemployment rate in japan, about 3. 5 percent, is low even by japanese standards. with everything else being equal, the lower the unemployment rate, the better the economic welfare. however, that may not be the whole story. the fact that we have achieved this very low level of unemployment with only modest economic growth in the last two years indicates how heavily our adverse demography is weighing on the supply side of the economy. japan ’ s working - age population started to decline in the middle of the 1990s, and this decline is now gaining pace. this represents a considerable threat to potential growth, which has declined to an anemic 0. 5 percent, or possibly even lower. in order to restore a stronger supply side, we need to raise labor participation rates among the female and elderly population as well as labor productivity. as a matter of fact, the third arrow of abenomics is already working on these issues. although a central bank cannot directly change the potential growth rate, the bank of japan ’ s unprecedentedly accommodative monetary stimulus is certainly helping the reforms by dispelling the deflationary mindset. in professor tobin ’ s day, the policy problem was primarily related to a trade - off between the social costs of unemployment and those of inflation. the picture is different now. most major economies are in need of both higher inflation and more jobs. in this sense, there is no tradeoff. the new challenge has more to do with expanding our policy frontier than with choosing between trade - offs. this challenge is further complicated by the structural weakness of