Over the four years since the launch of large-scale
monetary easing – Quantitative and Qualitative
Monetary Easing (QQE) – the Bank of Japan has pursued
powerful monetary easing to overcome deflation, dispel the
deflationary mindset that has been deeply entrenched among
firms and households, and achieve the price stability target of
2%. Japan's economic activity has improved significantly, and
its economy is no longer in deflation, which is generally
defined as a sustained decline in prices, although it is still
distant from completely dispelling people's deflationary
mindset. Under QQE with Yield Curve Control, the Bank is
strongly committed to continuing with monetary easing to
achieve the price stability target of 2%.
Japan's economy is expanding moderately, with a virtuous
cycle from income to spending operating. Exports and business
fixed investment have been on an increasing trend on the back
of buoyant overseas economies and record-high corporate
profits. Private consumption has increased its resilience with
steady improvement in the employment and income situation.
Labour market conditions have continued to tighten. The output
gap is in positive territory and has improved steadily.
Going forward, Japan's economy is likely to continue its
moderate expansion on the back of highly accommodative
financial conditions and fiscal spending through the
government's large-scale stimulus measures, and also likely to
continue growing at a pace above its potential, mainly through
fiscal 2018. The output gap is expected to widen further within
Inflation has been relatively sluggish, as firms' wage- and
price-setting stance has remained cautious despite the acute
labour shortage and record-high corporate profits. Firms have
been making efforts to absorb a rise in labour costs by
increasing labour-saving investment and streamlining their
business processes. Reflecting such developments, a rise in
medium- to long-term inflation expectations has been lagging
behind, but these expectations are projected to rise as firms'
stances gradually shift toward raising wages and prices with an
improvement in the output gap continuing. The annual rate of
change in the Consumer Price Index (CPI) is likely to continue
on an uptrend and increase toward 2%.
Under QQE with Yield Curve Control the Bank sets the levels
of short- and long-term interest rates as the operating
targets, and it will facilitate the formation of a yield curve
that is considered most appropriate for maintaining the
momentum toward achieving the price stability target of 2%,
taking account of developments in economic activity and prices
as well as financial conditions.
The degree of monetary accommodation can be enhanced by
lowering the level of real rates. Even if the nominal rates
remain as they are, the level of real rates will be lowered
along with the improvement in inflation expectations. QQE with
Yield Curve Control has a self-reinforcing mechanism in place
that amplifies the effects of monetary accommodation through
lowered real rates.
Given that there is still a long way to go to achieve the
price stability target of 2%, there is no reason to reduce the
degree of monetary accommodation at the moment. The Bank will
continue with QQE with Yield Curve Control, aiming to achieve
the price stability target, as long as it is necessary for
maintaining that target in a stable manner.