januar y 9, 2018 bank of japan germany and japan — a central banker's perspective on their past and future relationship speech at the dinner meeting hosted by deutsche bundesbank regional office in berlin and brandenburg hiroshi nakaso deputy governor of the bank of japan introduction vielen dank fur ihre sehr freundlichen worte. es ist mir eine große freude und ehre, hier heute im schonen berlin und brandenburg vor ihnen sprechen zu durfen! ich wurde mir wunschen, meine ansprache weiter auf deutsch halten zu konnen. um ihnen aber meine gedanken besser vermitteln zu konnen, werde ich nun auf englisch fortfahren. ( thank you very much for your kind words. it is my pleasure and honor to speak to you here today in the beautiful city of berlin and brandenburg. i wish i could go on with the speech in german. but in order to better convey my thoughts to you, i will now continue in english. ) i. relationship between germany and japan germany and japan have a longstanding diplomatic relationship of more than 150 years. i think the phrase that best describes this is ferne gefahrten ( distant companions ). this is because we have many things in common, although our countries are geographically distant. the diligence of our populations has overcome limitations of natural resources, transforming our two countries into economic powers. today, the labels'' made in germany'' and'' made in japan'' are a guarantee of quality and excellence. and as mature economies, we face similar challenges in the future, with societal aging being one example. the central banks of germany and japan also developed a friendship over the years. the bank of japan established an office in frankfurt am main in 1956. the bundesbank opened its tokyo office in 1987, as the only overseas office besides new york. in 2012, the role of the tokyo office was expanded to include foreign exchange reserve management. the history of our bilateral relationship traces back to the time of the reichsbank and the bank deutscher lander. in this context, let me tell you an extraordinary story involving a former governor of the bank of japan. ii. mr. mayekawa's extraordinary experience in the very early part of my career at the bank of japan, i

is that we have two target rates. the short - term policy interest rate is set at minus 0. 1 percent and the target level of the 10 - year japanese government bond ( jgb ) yields at around 0 percent. we are buying a necessary and sufficient quantity of jgbs to maintain the rate targets. i think the policy has been quite effective. the left panel in slide 14 shows that japan's yield curve generally stays lower than those in the united states and germany. a comparison with the german yield curve reveals that, while shorter rates are lower in germany, long - term rates are kept lower in japan than in germany. the right panel compares 10 - year bond yields in the major economies. while the u. s. treasury rates moved up after the presidential election in november 2016, dragging the german bunds rates in the same direction, the jgb yields remained at lower levels under ycc. i now turn to economic and inflation development in japan to show that the monetary policy has worked quite effectively. slide 15 provides the bank of japan's latest economic and inflation outlook. as you see in the table, japan's economy is forecast to grow 1. 9 percent in fiscal 2017 and 1. 4 percent in fiscal 2018. this is well above japan's potential growth rate, which is estimated to be around 0. 8 percent. therefore, the output gap is expected to improve further into positive territory. this is supposed to exert upward pressure on prices. however, on the inflation front, consumer price index ( cpi ) inflation rates remain weak and are only expected to reach 1. 8 percent in fiscal 2019, still falling short of the price stability target of 2 percent. in the meantime, the economy has never been better balanced in the recent past. as we see in the left panel of slide 16, corporate profits have climbed to record high levels. the labor market is very tight with the unemployment rate, shown in the middle panel, all the way down to 2. 7 percent, which implies full employment. meanwhile, job opening rates, as shown in the right panel, rose to historically high levels. so, the question is why the prices are so weak when the macroeconomic fundamentals are so favorable. as a matter of fact, this may be a common question to be asked of the economies of the united states and the euro area. my answer to the question in japan is that, against the backdrop of acute labor shortage, corporate firms in japan are trying to