Japan Central Bank Statement

Author: | Published: 19 Oct 2018
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Over the past five years and 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 in the sense of a sustained decline in prices, although there is still a long way to go to achieve the 2% target. Therefore, the Bank has been strongly committed to continuing monetary easing, introducing "QQE with Yield Curve Control" in September 2016, and strengthening the framework for continuous powerful monetary easing in July 2018.

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 growing overseas economies and high corporate profits. Private consumption has been increasing moderately, albeit with fluctuations, against the background of 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, mainly against the background of highly accommodative financial conditions and the underpinnings through government spending. The potential growth rate is expected to follow a moderate uptrend. The output gap is expected to widen further within positive territory.

Despite such improvements in labour market conditions and economic activity, inflation has been sluggish due to a combination of several factors: (1) firms' cautious stance toward raising wages and prices; (2) households' continuous cautiousness toward price rises; and (3) downward pressure on prices stemming from intensifying competition in some areas. Nevertheless, moves to raise sales prices are starting to be observed recently. As firms' stance shifts toward further raising wages and prices with the output gap remaining positive, actual inflation will rise, leading to a rise in inflation expectations. The annual rate of change in the CPI is likely to continue on an uptrend and increase toward 2%.

The Bank has smoothly conducted "QQE with Yield Curve Control" for nearly two years. However, it is taking more time than expected to achieve the 2% target. Given this, there is no reason to reduce the degree of monetary easing at the moment. Rather, in July 2018, the Bank decided to strengthen its commitment to achieving the price stability target of 2% by introducing forward guidance for policy rates, and to enhance the sustainability of "QQE with Yield Curve Control" by conducting market operations as well as asset purchases in a more flexible manner, thereby maintaining the output gap as long as possible within positive territory. The Bank recognises that this will lead to achieving the price stability target at the earliest possible time, while securing stability in economic and financial conditions.