hiroshi nakaso : development finance in the economy facing double trilemmas article by mr hiroshi nakaso, deputy governor of the bank of japan, contributed to the joint imf - bank indonesia conference “ future of asia ’ s finance : financing for development 2015 ”, 2 september 2015. * * * accompanying charts can be found at the end of the speech or on the bank of japan ’ s website. introduction it is a great honor for me to contribute to the joint imf - bank indonesia conference. under the title “ future of asia ’ s finance : financing for development 2015 ”, i will first look back at japan ’ s post - war experience of financing for the development of specific industries, and will then explain lending behavior of japanese banks including their involvement in project finance for emerging asian countries in the last two decades. based on these two examples regarding japan ’ s financial intermediation function, i will finally share my views on policies for the stability of development finance in emerging economies facing double trilemmas, i. e., mundell ’ s and schoenmaker ’ s trilemmas. evaluation of the priority production system in japan after world war ii : importance of price stability a period of strong economic expansion known as the “ asian miracle ” ensued in the aftermath of world war ii, characterized by a “ flying geese ” pattern of development. this began in the 1960s with high growth in japan, followed by economic take - off in other asian countries. to begin with, i would like to look at the situation during the period of post - war reconstruction in japan. the situation immediately after the end of world war ii in japan was characterized by a combination of severe problems such as ruined infrastructure, a sluggish recovery in goods production, and high inflation. for example, as shown in figure 1, the level of industrial production dropped significantly to about 30 % of the peak level before the war ( 1934 – 36 ). the stagnation of production at that time was caused not so much by a lack of production facilities as by a shortage of raw materials such as coal and steel. the coal production level in domestic mines dropped below 40 % of the peak level before the war ( 1934 – 36 ) due to the lack of digging materials made of steel. in turn, the steel production industry remained stagnant due to the coal shortage. in order to overcome this situation, the japanese government at that time applied the “ priority production system ”, in which resources

the target in a sustainable and stable manner. the path we have drawn is a difficult one, in which the actual inflation rate will decline and inflation expectations will rise, and both will land at around 2 percent. so far, however, the developments in prices and inflation expectation, including the economic mechanisms behind them, seem to have been largely on the path. if this outlook will continue to be realized, the bank will raise the policy interest rate accordingly and adjust the degree of monetary easing, as it did in march and july last year. what i have described so far are the central scenario for the prices and the broad outlook for the monetary policy. but there are various risk factors at home and abroad, both upside and downside, and the policy should be conducted with due attention to them. on the domestic front, one of the issues we should pay close attention to is the outlook for wage increases in fiscal 2025. each firm faces unique challenges, and raising wages would by no means be a simple matter. but i hope to see strong wage hikes in fiscal 2025 as we did in fiscal 2024, given the high ratio of firms reporting favorable business conditions, strong corporate profits, low labor share ratio, accelerating labor shortages, employees searching and changing jobs increasingly actively, and the minimum wage raised last october. on the occasions of new year ceremonies, leaders of various sectors gave encouraging messages on wage increases in fiscal 2025. at our branch managers'meeting held last week, we heard many positive reports, and multiple branch managers talked about companies which incorporated plans on continued wage increases in their medium - term business plans. the ratio of companies which respond that they will raise wages in fiscal 2025 and the rate of planned wage increases are broadly at or above the levels seen one year ago, according to many of the relevant surveys. regarding the overseas economy, one of the issues to look at is the policies of the new u. s. administration and their impact on the u. s., global and japanese economy. continuous monitoring will be warranted, but the inaugural address next week will give us an idea on the broad direction of policies the new administration will pursue. experts will continue their debates on medium - to long - term effects of new policies, but, based on what has been known by today, many expect the u. s. economy to continue performing strong over the coming period, which seems to be in contrast with the outlook entertained around august last year when downside risks were the focus