kikuo iwata : japan ’ s economy and monetary policy speech by mr kikuo iwata, deputy governor of the bank of japan, at a meeting with business leaders, okayama, 2 december 2015. * * * accompanying charts can be found at the end of the speech and on the bank of japan ’ s website. introduction it is my pleasure to have the opportunity today to exchange views with administrative, financial, and business leaders in okayama prefecture. i would like to take this chance to express my sincerest gratitude for your cooperation with the activities of the bank of japan ’ s okayama branch. today, i would like to have your views on the actual situation of the local economy as well as your candid opinions about the bank ’ s policies and activities. before exchanging views with you, i will briefly explain the recent economic developments at home and abroad, and then touch on some points regarding monetary policy. i. the current situation of japan ’ s economy and its outlook looking at japan ’ s economy, exports and production are affected by the slowdown in emerging economies, particularly china. however, with firms having seen record profits, a virtuous cycle from income to spending in both the corporate and household sectors is in place, and japan ’ s economy has continued to recover moderately. in the following, i would like to elaborate on this issue. a. developments in exports and overseas economies japan ’ s exports have been more or less flat recently ( chart 1 ). breaking these down by region, exports to advanced economies such as the united states and europe have maintained their moderate increasing trend, but those to emerging economies have shown weaker developments, particularly to east asia. the background to this is that the decelerated situation for the chinese economy is continuing with downward pressure from excess capacity and inventory adjustments in the manufacturing sector, and that the effects of the chinese economy have been spreading to other emerging and commodity - exporting economies through trade. in this situation, japan ’ s production also has been more or less flat. as for the outlook for overseas economies, it is likely that the effects of the slowdown in emerging economies will remain for the time being, but that moderate growth, mainly in advanced economies, will continue, and this will positively affect emerging economies. the chinese economy is expected to generally follow a stable growth path with a variety of economic stimulus measures being implemented. as shown in the october 2015 world economic outlook ( weo ) published by the international monetary fund

rate for october has declined to 3. 1 percent, a low level last seen in 1995. under this circumstance, upward pressure is being exerted on wages. scheduled cash earnings in the monthly labour survey have been positive on a year - on - year basis for three consecutive quarters since the turn of the year, with base pay being raised for two years in a row ( chart 4 ). private consumption has been resilient, as evidenced by a clear increase on a quarter - on - quarter basis for the july - september quarter against the background of steady improvement in the employment and income situation. that said, a virtuous cycle in both the corporate and household sectors has been maintained in japan ’ s economy. the real gdp growth rate for the july - september quarter was slightly negative for a second consecutive quarter, but this is mainly due to the progress in inventory adjustments, and final demand as a whole has been increasing. turing to the outlook, japan ’ s economy through fiscal 2016 is likely to continue growing at a pace above its potential, which is estimated to be around 0. 5 percent or lower recently. as shown in the outlook for economic activity and prices ( hereafter the outlook report ) released at the end of october, the outlook in terms of the median of the policy board members ’ forecasts of the real gdp growth rate was 1. 2 percent for fiscal 2015 and 1. 4 percent for fiscal 2016. ii. monetary policy and price developments in japan as i have explained, japan ’ s economy is likely to continue growing at a pace above its potential. in this situation, how are prices expected to develop? next, i would like to talk about price developments in japan after touching on the bank ’ s monetary policy. a. change in policy regime the bank is implementing quantitative and qualitative monetary easing ( qqe ) that aims at converting people ’ s deflationary mindset, which has been formed firmly amid the prolonged period of deflation, to one that moderate inflation is to be expected. that is, it is preparing a bis central bankers ’ speeches foundation on which people can act on the assumption that prices will continue to rise moderately. qqe consists of two pillars. the first is a clear commitment under which the bank will achieve the price stability target of 2 percent in terms of the year - on - year rate of change in the consumer price index ( cpi ) at the earliest possible time, with a time horizon of about two years. the second