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.