Economic Outlook and Monetary Policy Address in Japan’s Eastern Region

In a recent address at the Hokkaido Eastern Region Financial and Economic Forum, Bank of Japan’s Policy Board member Naoki Tamura discussed the nation’s economic conditions and monetary policy operations. Here are the key points:

1. Economic Conditions:

Household Sector: Personal consumption is gradually increasing at a steady pace, supported by pent-up demand stemming from accumulated savings during the pandemic, positive changes in consumer behavior, and improvements in consumer sentiment due to eased COVID-19 restrictions. While factors like inflation and adverse weather have impacted consumption, the overall trend is positive.

Corporate Sector: Exports and production have maintained stability despite the slowdown in overseas economies. Strong order backlogs and eased supply constraints have contributed to this stability. Corporate earnings remain at high levels across different industries, supporting business investment, which is expected to increase steadily.

Economic Outlook: Global economies continue to face inflation pressures, leading central banks to sustain their rate hikes. Japan’s economy is projected to experience a modest recovery due to a mix of factors including eased supply constraints, pent-up demand, and supportive fiscal policies. The GDP growth forecast for 2023 is +1.3%, followed by +1.2% in 2024 and +1.0% in 2025. Japan’s growth is expected to outpace its potential growth rate.

2. Price Situation:

Consumer Prices: Consumer prices have risen significantly, exceeding 2%, attributed to higher import prices due to resource and grain price increases and a weaker yen. Consumer prices, excluding volatile fresh food and energy, have surpassed 4%, with both goods and services showing upward trends.

Price Outlook: Monthly inflation is predicted to stabilize as the effect of price pass-through from import price increases gradually diminishes. On a yearly basis, consumer prices are projected to rise by +2.5% in 2023, +1.9% in 2024, and +1.6% in 2025.

3. Monetary Policy Operations:

Price Stability Objective: The Bank of Japan’s monetary policy aims for a sustained and stable achievement of the 2% inflation target while maintaining economic stability. This objective is realized through yield curve control, which targets short-term interest rates and long-term government bond yields.

Flexible Implementation: Recent monetary policy changes include the decision to flexibly manage yield curve control. The upper limit on long-term interest rates has been increased to 1.0% to account for potential risks and uncertainties, while maintaining overall policy flexibility.

4. Wage-Price Positive Feedback Loop:

Promoting Positive Feedback: An ongoing focus of monetary policy is the realization of a positive feedback loop between wages and prices. Encouragingly, changes in corporate behavior have led to wage increases and price adjustments. The momentum from wage increases and improved consumer sentiment is contributing to the virtuous cycle between wages and prices.

Outlook: The success of future monetary policy hinges on the establishment of a sustainable feedback loop between wages and prices. Positive trends in wage-setting and price adjustments are crucial for achieving economic stability and promoting growth.

Naoki Tamura emphasized that while Japan’s economy is on a path to recovery, uncertainties remain. He highlighted the importance of monitoring data on wages and prices for better policy decisions. The speech underscored the Bank of Japan’s commitment to fostering a conducive environment for sustainable growth and price stability.