Japan Central Bank Statement

Author: | Published: 5 Sep 2017
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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 positive territory.

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.




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