toward strengthening the competitiveness and growth ... · masaaki shirakawa governor of the bank...
TRANSCRIPT
Masaaki Shirakawa
Governor of the Bank of Japan
Toward Strengthening the Competitiveness and
Growth Potential of Japan's Economy
Speech at the Executive Member Meeting of the Policy Board
of Nippon Keidanren (Japan Business Federation) in Tokyo
Bank of Japan
February 28, 2013
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Introduction
It is a great honor to have this opportunity to address the executive member meeting of the
Policy Board of Nippon Keidanren today. Before I start, let me express my deepest
appreciation for the information and views on current developments in economic and
financial activities as well as on policy conduct provided to us by all the member firms.
Today's speech is the last one I will give as Governor of the Bank of Japan. However, it
was not difficult for me to decide today's main topic, "toward strengthening the
competitiveness and growth potential of Japan's economy," because it is the most pressing
issue for Japan at present. It is also a very important theme for the Bank of Japan. As
you know, at the Monetary Policy Meeting in January, the Bank decided to introduce a
"price stability target" and set it at 2 percent.1 This target was introduced based on the
recognition that progress would be made by a wide range of entities in their efforts toward
strengthening the competitiveness and growth potential of Japan's economy (Chart 1). For
this reason, it is extremely important in conducting monetary policy whether such efforts
will actually make progress. In the following, I would like to talk about this theme while
paying due regard to the perspectives of macroeconomics, corporate behavior, and
economic policymaking.
I. The Aim of Economic Policy
While there has been active discussion regarding the conduct of economic policies in Japan,
I will first consider the aim of economic policy and the kind of situation we expect Japan's
economy to attain. Needless to say, the ultimate aim of economic policy is to raise the
living standard of each citizen. While there is no single indicator for gauging people's
quality of life, if we were to put this in approximate terms, the key aim of macroeconomic
policy is to raise the per capita consumption level, or to raise the real gross domestic
product (GDP), which is closely related to the former, in a sustainable manner (Chart 2).
Having said this, a more detailed discussion is necessary when considering the various
1 For details on decisions made at the Monetary Policy Meeting on January 22, 2013, including the
introduction of the "price stability target," please see Masaaki Shirakawa, "The Roles, Missions, and
Challenges of the Central Bank" (Speech at the Japan National Press Club in Tokyo), January 25,
2013.
http://www.boj.or.jp/en/announcements/press/koen_2013/data/ko130130a.pdf
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options regarding economic policy on the basis of the situation facing Japan's economy.
First, there is a need to consider the effects of the decline in the labor force due to the rapid
aging of Japan's population. Japan's current real GDP remains below the level seen prior
to the Lehman shock. Looking at per capita real GDP figures, the drop for Japan is
relatively small compared with countries such as those in Europe (Chart 3). Furthermore,
in terms of the level of real GDP per working-age person, Japan has exceeded the pre-crisis
level, which is a better performance than that of the United States. While "population
decline" is one of the clichés used in discussing Japan's economy, this fundamental fact is
oftentimes disregarded when discussing economic developments. Of course, figures do
not differ significantly within short time periods of a quarter or a year, but when considering
Japan's economic policy in the medium to long term, it is important to think in terms of
changes in per capita or per worker data.
Second, we need to take account of the progress in economic globalization. Specifically, it
is necessary to look not only at real GDP but also at real gross national income (GNI).
Real GNI is a concept of income that results from making the following two adjustments to
real GDP. One source of adjustment is the overseas income of Japanese nationals.
Looking at figures for 2012, overseas income amounts to 14.3 trillion yen -- that is, 3.0
percent of nominal GDP. In recent years, profits from outward direct investment have
been increasing in addition to profits from outward portfolio investment (Chart 4). The
other source of adjustment is the change in real purchasing power due to changes in the
foreign terms of trade. Japan's terms of trade have been deteriorating in recent years,
mainly due to the rise in commodity prices against the background of high growth in
emerging economies. Trade gains/losses -- in other words, real purchasing power arising
from changes in the terms of trade -- have thus been on a declining trend (Chart 5). Terms
of trade undergo changes, not only due to commodity prices but also in response to the
pricing power of Japanese firms through the non-price competitiveness of exports.
Fluctuations in foreign exchange rates, for example depreciation of the yen, will raise real
GDP through an increase in exports but may at times adversely affect trade gains/losses.
Effects on real GNI depend on the net result that takes into account these two adjustments
(Chart 6). Setting 2000 as the base year, real overseas income increased by about 2.5
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times in 2012, pushing up real GDP for 2012 by 1.9 percent compared with that in 2000.
On the other hand, the trade gains pushed real GDP downward by 5.8 percent.
Third, another topic for discussion is how to treat nominal GDP and real GDP in
considering economic policy. On this point, both of these increase when the economy
grows in a sustainable manner, suggesting that the direction of medium- to long-term policy
is not all that different depending on which figure we take into account. What I must
mention here is the cause-and-effect relationship between the two. The basic causal
relationship is that, as real GDP rises, the output gap tightens and prices subsequently rise,
resulting in a rise in nominal GDP (Chart 7). There are situations, of course, where prices
fluctuate first, as seen during the time of the oil crises. In such a situation, however,
economic conditions deteriorate, and this is different from what we wish to see. What we
are trying to achieve through economic policy is to raise real GDP, as a result of which
nominal GDP will rise.
In relation to this, the results of the Opinion Survey on the General Public's Views and
Behavior that the Bank conducts on individuals on a quarterly basis provide some
interesting findings. The survey results reveal that approximately 80 percent of the
respondents -- irrespective of their sex, age, and occupation -- have consistently viewed the
price rise as "rather unfavorable" throughout the past surveys (Chart 8). Underlying the
survey results is the concern that wages may not rise even if prices rise. A considerable
portion of the Japanese public is not simply looking for a situation in which prices rise. In
the phrase "overcoming deflation," people are looking for a situation in which one's salary
rises, employment is secured, and profits increase; in other words, a situation characterized
by a well-balanced improvement in economic conditions and consequent rise in prices.
The fourth point involves the problem of how to distribute the fruits of economic growth.
While market mechanism plays a key role in order for the economy to grow, this requires a
perspective of society as a whole that accepts such mechanism at large. On this point, the
situation surrounding income distribution is one of the crucial factors. In the United States,
during the period of economic expansion preceding the Lehman shock -- from 2002 to 2007
-- the real incomes of the highest-income households in the top 1 percentile increased by 86
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percent and household average income increased by 20 percent. In contrast, the "median"
household income -- that is, the income that represents the middle of a series of all
household incomes arranged in order of size -- increased only by 10 percent, which amounts
to just half the growth of the average income (Chart 9). The situation surrounding income
distribution partly depends on the proportion of the elderly that does not have any earnings,
and reviewing this through a single indicator can therefore be challenging. Japan's case
may not be as extreme as that in the United States. Nevertheless, awareness of the need to
achieve well-balanced economic growth, especially for the middle class, has increased
around the globe.
II. The Need to Strengthen Competitiveness and Growth Potential
Bearing these issues related to the aim of economic policy in mind, let me now move on to
the need to strengthen competitiveness and growth potential.2
Looking at developments in a country's economic growth rate over the longer term, factors
affecting it can be broken down into real or supply-side factors -- namely, capital stock,
labor force, and technological innovation. Explaining this within the framework of
so-called growth accounting, the growth rate can be broken down into growth in the number
of workers and that of value-added per worker, in other words, the labor productivity
growth rate (Chart 10). Mechanically estimating future growth in the number of workers,
based on the assumption of the most recent labor participation rate by gender and age, the
number of workers in Japan will change at a rate of -0.6 percent per annum in the 2010s and
-0.8 percent in the 2020s. Meanwhile, the labor productivity growth rate for the years
2000 through 2008 -- a period characterized by relatively favorable economic conditions --
was 1.4 percent on an annual basis. Adding this to the aforementioned growth in the
number of workers, the average growth will become 0.8 percent for the 2010s and 0.6
percent for the 2020s. This will merely amount to maintaining positive growth over the
next two decades. Japan's economy faces a considerably strong headwind in the form of a
decline in the labor force, and we need to more seriously acknowledge its implications.
2 The importance of strengthening growth potential and of the supply side is something many
central banks emphasize. Please see, for example, Speech given by Mervyn King, Governor of the
Bank of England, at the CBI Northern Ireland Mid-Winter Dinner, Belfast, 22 January 2013.
http://www.bankofengland.co.uk/publications/Documents/speeches/2013/speech631.pdf
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Raising the labor productivity growth rate further will alleviate the problem, of course.
Japan has achieved a growth rate slightly exceeding the average for the G-7 countries for
the past 10 years, however, and it is not very plausible to think that we can raise it by 1
percent or more at once (Chart 11).
At any rate, raising Japan's growth potential continuously into the future requires work,
especially strenuous work, on both the number of workers and the labor productivity growth
rate. While efforts by a wide range of entities are necessary in such case, the main actors
here, above all, are private firms. The corporate sector has consistently had a savings
surplus, together with households, since 1998 (Chart 12). A significant savings surplus by
the corporate sector is a phenomenon now observed outside of Japan as well: it has spread
to major advanced countries since the start of the 2000s. In terms of the amount of savings
surplus relative to GDP, figures for the United Kingdom, Japan, and the United States are
6.1 percent, 4.6 percent, and 4.1 percent, respectively. The most significant underlying
cause of this savings surplus is the lack of attractive investment opportunities at home amid
expanding investment opportunities in the emerging markets. Recently, other causes have
also been pointed out, including the securing of funds to offset additional costs that may
arise from a lack of funds for corporate pensions mainly resulting from a decline in interest
rates.
I presume that in your day-to-day decision making, you cannot muster enough confidence
to invest at home despite having ample liquidity on hand (Chart 13). In fact, on-hand cash
and deposits at Japanese firms has been increasing steadily: the proportion of Japanese
firms listed on the First and Second Sections of the Tokyo Stock Exchange (TSE) holding
cash and deposits exceeding the amount of interest-bearing debt -- in other words, firms
without net external borrowings -- has recently become as high as 43 percent.
Of course, firms' ample on-hand liquidity itself is reasonable up to some level, taking into
account experiences such as the post-bubble financial crisis and the aftermath of the failure
of Lehman Brothers -- that is, the shortage of U.S. dollar funds and the decline in the
functioning of the CP market. The current level of on-hand liquidity, however, appears to
go well beyond the amount of such precautionary demand. As for the use of excess funds,
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there are only three options: making real or financial investments at home and abroad;
disbursing funds to employees in the form of wages; and returning them to stockholders
through dividend payments and share buybacks. The economy will not see positive
outcomes unless some kind of change is brought about to the increased liquidity via one of
the aforementioned routes. In that sense, it is extremely important to change the business
environment, thereby modifying firms' incentives. That is why in achieving sustainable
growth with price stability, efforts toward strengthening the competitiveness and growth
potential of Japan's economy are necessary as much as monetary policy is indispensable in
this regard.
III. Outline of the Course of Future Measures
Next, I would like to outline the course of future efforts toward strengthening the economy's
competitiveness and growth potential.
Capturing Increasing Overseas Demand
The first course is to capture increasing overseas demand in the form of expanding Japanese
firms' overseas business activities. It is inappropriate to negatively describe such efforts as
the "hollowing-out" of industries in an environment where overseas economies -- mainly
emerging economies -- have grown much faster than Japan. With regard to international
division of labor, while manufacturing and assembly overseas expands, increasing the
export of intermediate goods from Japan and reinforcing domestic R&D activity, whose
value-added is relatively higher, will contribute to raising Japan's real GDP. In addition, if
surplus funds that have accumulated in the corporate sector are being used for overseas
investment with high returns, the benefit of such investment will be passed back to Japan in
the form of interests and dividends. This will not directly contribute to raising real GDP,
but it does raise real GNI. While globalization of the economy continues, it is deemed
imperative to make balanced efforts as a nation by combining domestic production with
exports as well as with foreign direct investment, or local production overseas.
Indeed, overseas investment by Japanese firms has been increasing, especially in Asia.
Such a trend has spread from large manufacturing firms to nonmanufacturing ones, as well
as small and medium-sized enterprises (Chart 14). Nevertheless, the outstanding amount
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of Japan's foreign direct investment remains at a low level compared with that of other
advanced countries (Chart 15). Similarly, in terms of the profitability of foreign
investment, which is the combination of portfolio investment and direct investment, Japan
falls a little behind countries such as the United States, partly because of its small share of
direct investment, which has a high rate of return (Chart 16).
Huge potential demand exists in emerging economies, particularly Asia, in the area of
building core infrastructure for transportation systems, energy supply, and communication
systems. According to the estimates of the Asian Development Bank, such demand will
amount to approximately 8 trillion U.S. dollars from 2010 to 2020 (Chart 17). There are
ample business opportunities for Japanese firms to make use of their globally recognized
cutting-edge technologies and wealth of experience -- such as upgrading metropolitan
infrastructure and implementing environmental and energy-saving technologies, as well as
deploying factory automation systems to address labor shortages and wage rises -- that have
been nurtured in Japan over the years. It has become increasingly apparent that Japanese
firms in such sectors as retail, healthcare, and education, which have focused mainly on the
domestic market, are able to formulate sweeping business strategies in large Asian markets,
where consumer demand is increasing briskly as these countries' middle-income
populations continue to expand.
Responding to the Aging Population
The second course is to respond to the rapidly aging population. The long average life
expectancy of the Japanese people implies that health, the condition most vital to well-being,
is being fulfilled at a high level. Having said that, it is necessary to adjust the economic
structure and social infrastructure as the population continues to age. Otherwise, it
becomes difficult to maintain the current high quality of life. While this is sometimes
misunderstood, the demographic change of population aging itself is not triggering the
problem for Japan's economy; the real issue is that Japan's economic structure and social
infrastructure have not sufficiently caught up with such demographic changes.
The aging of the population brings about various changes to the economy. First, it will
become a downside factor for economic growth via the economy's supply side -- namely, a
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decline in the labor force. In order to counter this trend, it is most important to increase
labor participation, particularly of the elderly and women.3 The labor participation rate of
60-69 year-olds has increased continuously over the last few years (Chart 18). The labor
participation rate of women is also increasing, but remains at a relatively low level
compared with other advanced economies (Chart 19).
Aging will also substantially change the demand structure of the economy. The area of
medical and nursing care is one worth mentioning. In the United States, the elderly
population aged 65 and older increased by 13 percent in the ten years from 2000, and as a
result, the expenditure in medical and nursing care rose by 82 percent. By contrast, in
Japan, while the elderly population increased by 29 percent, such expenditure only rose by
17 percent (Chart 20). In relation to this, it has often been pointed out that, in Japan, due
to a number of regulations and a shortage in the workforce, sufficient service in this sector
has not been provided relative to demand. While one should be mindful of the fiscal
implications, appropriate system design and regulatory reforms are likely to turn the
potential demand in medical and nursing care, as well as in medical equipment and
infrastructure, into actual demand. At the same time, medical and nursing care could
become one of the most promising domestic employers as Japanese firms expand their
overseas operations (Chart 21).4
Population aging also brings about an expansion in demand in the housing market. For the
child-raising generation, potential demand for larger housing is believed to be high, but
such demand has not been satisfied, particularly in the metropolitan areas. On the contrary,
members of the elderly generation continue to live in large houses that had been acquired
during their working age. Indeed, in Japan, the share of second-hand dwellings in the total
housing market (i.e., combining new and second-hand dwellings together) is only 12
3 For details on the importance of raising the labor participation rate of women, please see Chad
Steinberg and Masato Nakane, "Can Women Save Japan?" IMF Working Paper 12/248.
International Monetary Fund, 2012.
http://www.imf.org/external/pubs/ft/wp/2012/wp12248.pdf 4 In the United States since 1990, while the number of employees in manufacturing has decreased
by about 6 million, mainly due to an acceleration in the shift of production overseas, that in the
healthcare industry has increased by 6 million.
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percent, far less than the 79 percent in the United States and 86 percent in the United
Kingdom (Chart 22). Once the housing market is reorganized, potential demand for
housing will be cultivated by meeting the different needs in different stages of life, and this
will eventually invigorate related markets, such as electric home appliances and other
household items, as well as remodeling. Change is also desirable on the financial front.
It is often pointed out that, in Japan, household financial assets are concentrated in cash and
deposits. This partly reflects that the share of residential assets, that is, real assets with
large price fluctuations and low liquidity, among total household assets tends to be high
(Chart 23). If household assets start flowing into financial assets other than cash and
deposits, we might enjoy an increase in the supply of long-term risk money.
Promoting Smooth Transfer of Resources
The third course is to promote the smooth transfer of resources. In the medical care and
housing areas that I just talked about, not a shortfall in demand but the mismatch between
demand and supply has become the essence of the problem in the sense that potential
demand and actual supply do not correspond to each other. In recent years, sales of
pre-packaged tours to the elderly and sales in health-related industries have shown marked
increases. This suggests that firms have succeeded in cultivating potential demand by
making efforts to develop new products through shifting their human resources and capital
to those businesses.
Changes will surely create new demand and promote the introduction of new goods and
services. It is imperative to realize the optimal resource allocation by shifting labor and
capital resources within a firm, as well as among firms, industries, and regions, in
accordance with a changing demand structure. In short, the metabolic process is also
crucial in achieving economic growth. Looking at the founding years of the top 300 firms
in terms of market capitalization, there are more firms with long corporate histories in Japan
than in the United States (Chart 24). This is evidence that firms themselves have made
efforts to self-transform and have successfully managed to cope with a series of
environmental changes. It can also be said that dynamism is absent in terms of birth of
firms. Changes are surely taking place, however. For instance, looking at developments
in the stock market after the Lehman shock, comparatively small firms have recently been
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performing relatively well (Chart 25). The number of initial public offerings -- which
showed a large decline in recent years -- is gradually on a recovery trend, and such
movements are now also being observed outside large metropolitan areas. I am quite
encouraged by this development.
IV. Regulatory and Institutional Reforms, Corporate Governance Reform, and
Social Values
So far, I have talked about the outline of the measures toward strengthening competitiveness
and growth potential. In principle, this should happen in an economy as a result of
individual firms' rational choice. The fact that this is not happening in reality must be the
result of economic, institutional, or social factors. Accordingly, there is a need to improve
the economic environment, i.e., remove those obstructing factors.
Regulatory and Institutional Reforms
First, there needs to be an improvement, promoted by the government, in the environment
that will serve to back firms' efforts aimed at bringing about change. More specifically, it
is necessary for the government to carry out bold regulatory reform in order for firms to
broaden the areas in which they may embark on new challenges, and to make institutional
improvements to the labor market so as to allow workers to move more smoothly into
businesses and industries with high growth potential. In order to avoid an increase in
excessive social friction arising from responses to changes in the economic environment, it
is also necessary to provide support for career changes and to enhance the safety net.
Corporate Governance Reform
Second, it is necessary to ensure the appropriate functioning of corporate governance by
stockholders and investors.5 On this issue, Germany is a good source of reference. Until
the beginning of the 2000s, Germany was named as a country putting off essential structural
reforms, and the country indeed suffered from slow economic growth in the first half of the
5 For details on the effects of various legal institutions including corporate governance on corporate
profits, please see Nobuyuki Kinoshita, "The Institutional Background to Characteristics of Japanese
Firms' including Low Profitability" (available only in Japanese), IMES Discussion Paper Series
2012-J-12, Institute for Monetary and Economic Studies, Bank of Japan, 2012.
http://www.imes.boj.or.jp/research/papers/japanese/12-J-12.pdf
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2000s. Under such circumstances, however, it engaged in various reforms surrounding
corporate activity, including institutional reforms that allowed for flexible adjustments to
employment as well as enhanced information disclosure to investors. On this point, Japan
falls behind Germany, especially when it comes to reforming enterprise law in such areas as
corporate rehabilitation, as well as mergers and acquisitions. This is said to hinder
dynamic corporate restructuring, thereby eroding the international competitiveness of
industries across the board. It is also said that such an environment has accentuated the
anxiousness over legal liquidation or removed the fear of being taken over, and encouraged
to some extent the excessive accumulation of cash and deposits at firms.
Social Values
Third, society needs to face possible trade-offs between stability and change. Japan has
been somewhat dominated so far by a perspective that stressed the importance of stability.
The method of adding gradual "improvements" to one's company's products in accordance
with consumer needs in the existing domestic market can be considered a business
management style that puts importance on stability. Merely making improvements
focused on the domestic market amid a population decline, however, carries the risk of the
economy falling into a shrinking cycle. Corporate profits will suffer even more in the long
term if firms continue to keenly compete in terms of prices while maintaining their
commitment to securing employment. If I may make a sweeping generalization, firms are
facing a judgment call of choosing between "improvement," which represents continuity,
and "innovation," which represents discontinuity. If the shock against the economy is
temporary, there may be a point to overcoming any difficulties in the immediate future via
"improvements," thus prioritizing stability in the long term. Confronting long-lasting
shocks such as globalization and population aging by means of the same "improvement" as
before, however, may delay responses to significant changes.
Reform cannot proceed without public consensus. Bringing about innovation requires
firms' willingness to take on challenges as well as the transfer and reallocation of necessary
resources. Frictions may well be experienced in the process. While this is not
necessarily an issue with one indisputable solution, if environmental change is long-lasting,
I find it extremely important for society as a whole to accept such changes and adopt a view
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that encourages any and all efforts to take on new challenges, in order to successfully carry
out reforms toward strengthening growth potential.
V. Relationship with Prices
So far, I have talked about the efforts to strengthen the economy's competitiveness and
growth potential. Next, getting slightly off track, I will touch upon the relationship
between economic growth and prices.
The year-on-year rate of change in the consumer price index (CPI) is currently around 0
percent, but is expected to reach 0.9 percent in fiscal 2014, according to the Bank's forecasts.
This is based on the view that Japan's economy will continue to grow above its potential
growth rate and the output gap will be filled, assuming that overseas economies moderately
improve. However, considering the fact that the output gap has narrowed significantly
compared with its peak, and given the sensitivity of prices to the gap, the closing of the gap
alone will not allow us to reach the target of 2 percent right away. What is the general
image of an economy that achieved 2 percent inflation, and what is the mechanism behind
the process leading up to this state? In theory, one can come up with several cases.
The first involves a push from rising import prices as a result of the yen's depreciation or
rising international commodity prices. The second is related to rising wages. In the
medium to long term, wages and prices are closely correlated. The third sees rising
inflation expectations. Finally, the fourth corresponds with rising growth expectations of
firms and households.
Which case are we looking for? In the case where import prices push up inflation,
household real income is squeezed. The ideal situation is that a rise in wages, a rise in
inflation expectations, and a heightening of firms' and households' growth expectations take
place at the same time. What should be noted here is the relationship between wages and
prices. One of the main factors behind low inflation rates in Japan relative to other
economies is Japan's employment practice. Specifically, Japanese society since the second
half of the 1990s has prioritized securing employment, and it effected reductions in costs
largely by cutting back wages; consequently, prices fell (Chart 26). Looking at
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development patterns of corporate profits, wages, and prices during economic recovery
phases, these three indicators moved together in the same direction during the high-growth
era in the 1970s (Chart 27). At present, neither wages nor prices have changed materially
even in the economic recovery phase, as corporate profits have acted as a buffer to absorb
shocks, with the labor distribution rate rising during economic recession phases and
declining during recovery periods. The primary cause for this is the decline in firms'
profitability, which in turn reflects the decline in the potential growth rate. On this point,
looking at the relationship between medium- to long-term inflation expectations and
potential growth rates, there is a clear positive correlation in Japan (Chart 28). If firms'
and households' growth expectations improve, this will have a positive effect on wages and
prices in a sustainable manner. Consequently, "deflationary expectations" that had taken
hold over a prolonged period will fade away.
VI. The Will to Reform
While it generally has been recognized that there is a need to work toward strengthening
competitiveness and growth potential, and that meeting these challenges is essential in
overcoming deflation and achieving sustainable growth with price stability, why is it that
such efforts have not made progress? On this point, the key lies in the sense of urgency
regarding the need for reform. The problems currently facing Japan's economy, namely,
the rapid aging of the population and accompanying issues, are not temporary. They are
steadily affecting the economy in the manner of a chronic illness. Deterioration of fiscal
conditions is a textbook example of such problems. In order to maintain fiscal
sustainability, it is necessary to reform the structure of expenditures and revenues as well as
strengthening growth potential. Unless the growth rate rises, a modest increase in the rate
of inflation alone will barely improve the fiscal balance. While such chronic symptoms
exist in Japan, acute ones have not appeared. The biggest reason for this lies in the fact
that Japan holds a massive amount of external net assets reflecting the current account
surplus that has continued over a prolonged period. Because of this, Japan tends to
experience inflows of capital that search for a safe haven, even in the event of a global
economic shock, and enjoy stable long-term interest rates while facing an appreciation of
the yen. Japan has not experienced any sell-off of its currency in a crisis.
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In this regard, I would like to make reference to recent developments in financial markets.
The keywords to understanding movements in the global financial markets over the last
several years are risk-on and risk-off. When faced with a great amount of uncertainty
about the future, investors stay away from risks -- in other words, they become risk-off --
but when such uncertainty is judged small, they become risk-on (Chart 29). The basic
background to the yen's appreciation that lasted until summer 2012 was investors'
preference for safe assets as the European debt problem intensified. Indeed, it was in late
July that the yen hit its recent peak in the nominal effective exchange rate and the Spanish
and Italian sovereign rates reached the most elevated levels. After that, a variety of safety
valves to cope with the European debt problem were put in place in Europe and the fiscal
cliff was avoided in the United States. Against the background of these developments,
global investors' risk aversion has substantially receded. Broadly speaking, the yen's
recent depreciation and rise in stock prices in Japan are also taking place amid such changes
in those investors' risk aversion. Put differently, investors' attitude toward risk may
influence market conditions. I believe this could be easily understood by looking back at
the fact that yields on government securities of member states of the euro area had remained
at practically the same levels for nearly ten years. What ultimately drives market
developments is economic fundamentals. Over the last 15 years in Japan, there were
several phases when the yen depreciated. Although exports and production increased
during those phases, we regrettably did not succeed in raising the potential growth rate
(Charts 30 and 31). The important thing is to make use of the current favorable conditions
and make steady efforts to strengthen the competitiveness and growth potential of the
economy.
VII. Conduct of Monetary Policy by the Bank of Japan
Lastly, I would like to go over the recent monetary policy measures by the Bank of Japan.
As I mentioned at the outset, the Bank recognizes that the inflation rate consistent with
price stability on a sustainable basis will rise as efforts by a wide range of entities toward
strengthening competitiveness and growth potential of Japan's economy make progress.
Based on this recognition, at the Monetary Policy Meeting held in January, the Bank set and
announced the "price stability target" at 2 percent in terms of the year-on-year rate of
change in the CPI. As stated in the Bank of Japan Act, the Bank conducts monetary policy
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based on the principle that the policy shall be aimed at "achieving price stability, thereby
contributing to the sound development of the national economy." Put differently, the Bank
aims at achieving price stability with which Japan's economy will grow in a sustainable and
balanced manner, and under such a principle, the Bank has been pursuing aggressive
monetary easing with the aim of achieving this price stability target at the earliest possible
time. The Bank, under the Asset Purchase Program, will additionally purchase financial
assets amounting to about 36 trillion yen, mainly JGBs, by the end of this year.
Furthermore, from January 2014 onward, it will purchase about 13 trillion yen worth of
assets, 2 trillion yen of which will be JGBs, every month without setting any termination
date. The Bank is committed to pursuing, without loosening the reins, aggressive
monetary easing with the aim of achieving the "price stability target."
Efforts by the government, in parallel with appropriate monetary easing measures, are
important in order to overcome deflation early and achieve sustainable growth with price
stability, for the following reasons.
First of all, if the government's efforts to strengthen competitiveness and growth potential
make progress, economic agents will take further advantage of the accommodative financial
conditions and the effects of monetary easing will be increasingly amplified. At present,
money, or liquidity that the Bank has been supplying, is increasing significantly; however,
prices have not been responding accordingly (Chart 32).6 Private financial institutions
have been increasing their government bond holdings rather than lending (Chart 33). On
this point, the government has stated its intention to advance structural reform of the
economy by making use of all possible decisive policy actions, including carrying out bold
regulatory and institutional reforms. The Bank expects that forceful efforts will be
forthcoming in this regard.
Meanwhile, the Bank itself has established a "Loan Support Program" through which to
6 On this point, Chairman Bernanke of the Federal Reserve stated during the press conference on
December 12, 2012 that "there's no effect on inflation expectations from the size of our balance
sheet." For details, please see Federal Reserve Board, "Transcript of Chairman Bernanke's Press
Conference," December 12, 2012.
http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20121212.pdf
16
encourage proactive efforts by firms and financial institutions, using the levers of finance.7
Together with the aforementioned Asset Purchase Program, the Bank will supply additional
funds amounting to over 60 trillion yen in the next two years. The amount outstanding
will exceed 130 trillion yen, which is about 30 percent of nominal GDP (Chart 34). While
monetary easing by the central bank has a stimulating effect on current economic conditions
by bringing forward tomorrow's demand to today, so to speak, such effect will wane once it
becomes tomorrow and unless demand for the day after is brought forward. At any rate,
the size of the demand brought forward depends on future growth potential. This makes
efforts to raise the potential growth rate itself all the more important. If such efforts by the
Bank on the financial side and those by the government to strengthen the growth potential
could instigate a virtuous cycle and bring about synergies, the policy effects are likely to be
amplified.
Second, in order to pursue aggressive monetary easing, ensuring confidence regarding fiscal
policy is also important. As part of its monetary easing, the Bank has been purchasing a
substantial amount of government bonds. Given the severe fiscal conditions, however, if
such purchases were regarded as monetizing government debt in the markets at home and
abroad, there is a risk that long-term interest rates would rise. In particular, if efforts to
strengthen the growth potential do not make progress and the Bank's holding of JGBs
continues to increase, that risk becomes more imminent. Were this to occur, not only
would the effects of monetary easing weaken, but there would also be adverse effects on the
real economy through the impacts on the businesses of financial institutions holding a large
amount of government bonds. 8 In that sense, discipline is expected of both the
government and the Bank. Discipline within the Bank is stipulated by the purpose
imposed on the central bank, that is, contributing to sustainable growth through price
stability and financial system stability. Meanwhile, the government is required to uphold
7 The Bank established the "Loan Support Program" by integrating the "Growth Supporting Funding
Facility" introduced in June 2010 and the "Stimulating Bank Lending Facility" introduced in
October 2012. 8 On the relationship between fiscal sustainability and financial system stability, as well as price
stability, please see Masaaki Shirakawa, "The Importance of Fiscal Sustainability: Preconditions for
Stability in the Financial System and in Prices" (Remarks at the Banque de France Financial
Stability Review Launch Event in Washington D.C.), April 21, 2012.
http://www.boj.or.jp/en/announcements/press/koen_2012/data/ko120422b.pdf
17
fiscal discipline. On this point, the government stated clearly that it "will steadily promote
measures aimed at establishing a sustainable fiscal structure with a view to ensuring the
credibility of fiscal management." Once credibility is eroded and the economy falls into a
state of confusion, there will be limited room for maneuver by the central bank.
Economists generally refer to this kind of situation as "fiscal dominance." In order to
prevent such a situation from materializing, it is important to engage in efforts to achieve
fiscal reform, thereby maintaining fiscal discipline in the medium to long term.
Final Remarks
While there is active discussion regarding the conduct of economic policy in Japan, I
personally feel there is a need to earnestly discuss what it is that we truly want to achieve
when referring to "overcoming deflation," and what it is that we must carry out in order to
accomplish this. The opportunity is right in front of us now. Once we find what we want,
we must take action.
The Bank will continue to do its utmost toward overcoming deflation early and achieving
sustainable growth with price stability. The purpose of the central bank is to lay stable
economic and financial foundations that support the sustainable growth of the economy.9
In doing so, it goes without saying that the Bank will thoroughly examine the outlook for
economic activity and prices and risk factors to sustainable growth. Independent central
banks are obviously expected to explain the effects as well as costs of measures in the
longer term. I believe this is what accountability means.
As the experience of the global credit bubble in the mid-2000s suggests, time and again, the
seeds of new problems and unexpected crises have already been sown as authorities respond
to a problem. This provides us with a renewed sense of awareness of the importance of
humility to learn from history and of stability from a medium- to long-term perspective.
The Bank of Japan will continue to listen to a variety of views and conduct monetary policy
appropriately on the judgment and under the responsibility of its Policy Board with the aim
9 For more on this point, please see Masaaki Shirakawa, "The Roles, Missions, and Challenges of
the Central Bank" (Speech at the Japan National Press Club in Tokyo), January 25, 2013.
http://www.boj.or.jp/en/announcements/press/koen_2013/data/ko130130a.pdf
18
of overcoming deflation early and achieving sustainable economic growth with price
stability. I ask for your continued support.
Thank you for your attention.
Toward Strengthening the Competitiveness andGrowth Potential of Japan's Economyp y
Speech at the Executive Member Meeting of the Policy Boardof Nippon Keidanren (Japan Business Federation) in Tokyoof Nippon Keidanren (Japan Business Federation) in Tokyo
February 28, 2013
Masaaki ShirakawaGovernor of the Bank of Japan
ContentsContents
IntroductionIntroduction
I. The Aim of Economic Policy
II The Need to Strengthen Competitiveness and Growth PotentialII. The Need to Strengthen Competitiveness and Growth Potential
III. Outline of the Course of Future Measures
IV Reg lator and Instit tional Reforms Corporate Go ernance ReformIV. Regulatory and Institutional Reforms, Corporate Governance Reform,
and Social Values
V Relationship with PricesV. Relationship with Prices
VI. The Will to Reform
VII Conduct of Monetary Policy by the Bank of JapanVII. Conduct of Monetary Policy by the Bank of Japan
Final Remarks
The Bank of Japan introduced the "price stability target" and set it at 2 percent,based on its recognition that efforts to strengthen the competitiveness
Chart 1
based on its recognition that efforts to strengthen the competitivenessand growth potential of Japan's economy will make progress.
The Bank recognizes that the inflation rate consistent with price stability on a
Introduction of the "Price Stability Target" (Jan. 2013)g p y
sustainable basis will rise as efforts by a wide range of entities toward strengthening competitiveness and growth potential of Japan's economy make progress Based on this recognition the Bank sets the price stability target at 2progress. Based on this recognition, the Bank sets the price stability target at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI).
Under the price stability target specified above, the Bank will pursue monetary easing and aim to achieve this target at the earliest possible time. Taking into g g p gconsideration that it will take considerable time before the effects of monetary policy permeate the economy, the Bank will ascertain whether there is any significant risk to the sustainability of economic growth including from thesignificant risk to the sustainability of economic growth, including from the accumulation of financial imbalances.
1
Chart 2 The key aim of macroeconomic policy is to raise real GDP in a sustainable manner.
Japan's Real GDP
CY 1990=100
130
135CY 1990 100
120
125
110
115
105
110
95
100 Real GDP Real GDP per capita Real GDP per working-age person
2
Notes: 1. Working-age person refers to those from 15 to 64 years old.2. Population figures for 2012 are extrapolated using the growth rates for 2011.
Sources: Cabinet Office; World Bank.
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12CY
When adjusting for the effects of the population decline, a different picture emerges from developments in real GDP following the Lehman shock.
Chart 3
Real GDP Real GDP per CapitaReal GDP
per Working-Age Person
106CY 2007=100
106CY 2007=100
106CY 2007=100
104
106
104
106
104
106
100
102
100
102
100
102
96
98
96
98
96
98
92
94
92
94
92
94
90
9
Japan UnitedStates
Euroarea
UnitedKingdom
90
9
Japan UnitedStates
Euroarea
UnitedKingdom
90
9
Japan UnitedStates
Euroarea
UnitedKingdom
3
Notes: 1. Figures are for 2012/Q4 calculated on the assumption that the average for 2007 is 100. 2. Population figures for 2012 are extrapolated using the growth rates for 2011. 3. Working-age person refers to those from 15 to 64 years old.
Sources: Cabinet Office; BEA; ONS; Eurostat; World Bank.
States area Kingdom States area Kingdom States area Kingdom
Chart 4
Profits from outward investment by Japanese firms have been increasing.
Amount Outstanding of Outward Investment Assetsand Income Balance Income Balance
tril yen tril yen tril yen25
600
700Foreign exchange reserves
Other investment
Portfolio investment
tril. yen tril. yen
Gross income received
(right scale)
25Others
Portfolio investment income
tril. yen
20
500
Portfolio investment
Direct investment
Income balance(right scale)
15
20 Direct investment incomeIncome balance
10
15
300
400
( g )
10
15 Gross income received
5
10
200
5
10
0
5
0
100
0
5
4Source: Bank of Japan.
00
00 01 02 03 04 05 06 07 08 09 10 11 12CY
0
00 01 02 03 04 05 06 07 08 09 10 11 12CY
Chart 5Japan's terms of trade have been deteriorating.
Changes in the Terms of Trade
170CY 2000=100
150
160
70
Export price index
Import price index
f d ( i /i i )
130
140Terms of trade (export prices/import prices)
100
110
120
80
90
100
60
70
80
5Note: Both export and import price indices are based on the GDP deflator.Source: Cabinet Office.
00 01 02 03 04 05 06 07 08 09 10 11 12CY
Chart 6 Real GNI depends on developments both in net income from the rest of the world and in trading gains/losses.
115
450
500real, CY 2000=100
net income from the rest
real, CY 2000=100
Figures for 2012/Q4 (CY 2000=100)
(1) Real GDP: 109
110
300
350
400
(1)
(2) of the world(1) Real GDP: 109(2) Real GDP+net income
from the rest of the world: 111(3) Real GDP+net income
from the rest of the world+ trading gains/losses: 105
105
200
250
300(3)
+ trading gains/losses: 105
tradinggains/losses
100100
150
950
50
00 01 02 03 04 05 06 07 08 09 10 11 12CYNet income from the rest of the world (left scale)(1) Real GDP (right scale)(2) Real GDP + net income from the rest of the world (right scale)(3) Real GDP + net income from the rest of the world + trading gains/losses (real GNI, right scale)
6
Note: Trading gains/losses are changes in real income (purchasing power), reflecting changes in the terms of trade (export prices / import prices).For example, when commodity price rises cause import prices to rise more than export prices, trading gains decline in reflection of deteriorated terms of trade.To be specific, the definition of trading gains/losses is "nominal net exports / weighted average of export and import deflators – real net exports."
Source: Cabinet Office.
Chart 7
Tightened demand-supply conditions resulting from economic improvementcause prices to rise not the other way aroundcause prices to rise, not the other way around.
Cross Correlation between CPI and Output Gap
104y/y, % % 1.0
time-difference correlation coefficient
6
8
10
2
3
4
0.8
0.9
.0
0
2
4
0
1
2
0 5
0.6
0.7
-4
-2
0
-1
0
0.3
0.4
0.5
Output gap leading CPI leading
-8
-6
-3
-2CPI (all items less fresh food, left scale)
Output gap (right scale) 0.1
0.2
Notes: 1. Figures for the CPI are adjusted to exclude the effects of the consumption tax introduction in 1989 (3 percent) and the consumption tax hike in 1997
-10-485 87 89 91 93 95 97 99 01 03 05 07 09 11
CY
0.0
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6quarters
7
(from 3 to 5 percent).2. The output gap is estimated by the Research and Statistics Department, Bank of Japan. 3. Shaded areas indicate recession periods.4. Figures for the cross correlation are calculated using data between 1990/Q1 and 2012/Q3.
Sources: Ministry of Internal Affairs and Communications; Cabinet Office, etc.
Chart 8 A considerable portion of the Japanese public is not simply looking for a situation in which prices rise alone.
80%
100%Comments of Households on the Price Rise
40%
60%
0%
20%
Jun 04 05 06 07 08 09 10 11 12Jun. 04 05 06 07 08 09 10 11 12Rather favorable Neither favorable nor unfavorable Rather unfavorable
79 2Self-employed,
Difference by Sex Difference by Age Difference by Job
85 8
84.0
F l
Male
85.5
87.1
40 - 59
20 - 39
86.3
86.2
79.2
Non-regularemployee
Regularemployee
Se e p oyed,agriculture, etc.
85.8
0% 20% 40% 60% 80% 100%
Female83.3
0% 20% 40% 60% 80% 100%
60 or older 85.0
0% 20%40%60%80%100%
Others
employee
Notes: 1. Surveys were conducted in March, June, September, and December. Results of the questionnaires were obtained via the in-home survey method through June 2006,
8
Notes: 1. Surveys were conducted in March, June, September, and December. Results of the questionnaires were obtained via the in home survey method through June 2006, thereafter via the mail survey method.
2. Figures for differences by sex, by age and by job are newly calculated using raw data of the December 2012 survey.3. "Self-employed, agriculture, etc." includes agriculture, forestry, fisheries, self-employed, working for a family business, and professional worker. "Others" includes full-
time homemaker, student, unemployed, etc.Source: Bank of Japan.
Chart 9
Awareness of the situation surrounding income distributionhas increased around the globe.
Average Income and Median Income of U.S. Households
has increased around the globe.
125CY 2002=100
120
115
120
Average income
Median income
110
105
110
Median income
95
100
85
90
75
80
9
Notes: 1. Median income is household income that represents the middle of a series of all household incomes arranged in order of size.2. Figures for income are adjusted to exclude price fluctuations, transfers from the government to households, and taxes.
Source: Congressional Budget Office (CBO), "Trends in the Distribution of Household Income Between 1979 and 2007."
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07CY
Chart 10
A decline in the labor force population represents a considerably strong h d i d f i J 'headwind facing Japan's economy.
6avg., y/y % chg.
4
5Labor productivity growth (the rate of growth in real GDP per worker)
Rate of change in the number of workers
R l GDP h
3
4 Real GDP growth rate
Forecast
+0.9%
+0.8%1
2
+0.5%-0.2%
0 6%1
0
-0.6%-0.8%
-1.2%-2
-1
1970s 1980s 1990s 2000s 2010s 2020s 2030s
10
Note: The rates of change in the number of workers from 2013 onward are calculated using the projected future population (medium variant) and the projected labor force participation rates (assuming that the labor force participation rates in each age/sex group remain the same as those in 2012).
Sources: Cabinet Office; Ministry of Internal Affairs and Communications; National Institute of Population and Social Security Research.
1970s 1980s 1990s 2000s 2010s 2020s 2030s
Chart 11Japan's labor productivity growth rate is comparable
with those for the G-7 countries.
Productivity Growth (Average after 2000)2.0
y/y % chg.
1.5
G-7 average after 2000: 0.9%
1.0
0.5
0.0
-0.5 Japan United Germany United France Italy Canada G7
Notes: 1. Productivity = GDP / number of employees.2. The productivity growth rate of the G-7 refers to the average of the seven countries.
Source: OECD.
p UStates
y UKingdom
y
11
Chart 12
A savings surplus by the corporate sector is a phenomenon now observed in other advanced countries as well
Savings Surplus of the Corporate Sector
12% of nominal GDP
a phenomenon now observed in other advanced countries as well.
8
10
JP: 4.6%US: 4 1%
UK: 6.1%
4
6
US: 4.1%
DE: 1.1%0
2
-4
-2
Japan United States
-8
-6
Japan United States
United Kingdom Germany
12Note: The corporate sector is calculated by removing two sectors -- general government and households -- from the domestic sector.Sources: Cabinet Office; BEA; Eurostat; ONS.
8
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11CY
Chart 13 While their on-hand liquidity has increased,firms cannot muster enough confidence to invest at home.
ROA
90
100
1.4
1.5Business fixed investment / cash flow ratio
times %45210 Amount of cash equivalent
held by companies
tril. yen %12Japan United States
Germany France
%
70
80
90
1.2
1.3
. / cash flow ratio
Company savings / net operating surplus
35
40
190
200Proportion of firms withoutnet externalborrowings(right scale)8
10Germany France
50
60
1.0
1.1
30
35
180
190 (right scale)
6
20
30
40
0.7
0.8
0.9
25170
2
4
0
10
20
0.5
0.6
0.7
15
20
150
160
0
2
CY2000 2005 2010
Notes: 1. The ROA for each country is weighted by the market capitalization of sample firms (excluding financial institutions) which are composed of each index (TOPIX for Japan, S&P for the United States, DAX for Germany, and CAC40 for France).
2. Sample firms for the middle and right-hand graphs are of all industries excluding finance and insurance.3. Company savings/net operating surplus for up to 2000 refers 2000 base figures.
90 95 00 05 10FY 95 00 05 10CY-end
CY2000 2005 2010
13
p y g p g p p g4. Cash flow = depreciation expense + ordinary profit/25. Sample firms in the right-hand graph consist of 1,260 firms listed on the First or Second Section of the Tokyo Stock Exchange, with March year-ends, and for which
data can be obtained consecutively from fiscal 1995 onward (excluding financial institutions). Firms without net external borrowings are those for which cash, deposits, and cash equivalents exceed their interest-bearing debt. Cash equivalents are short-term assets such as CP, CD, and bond investment trusts.
Sources: Bloomberg; Ministry of Finance; Cabinet Office.
Chart 14
Expansion of Japanese firms' overseas business activities has spread to small and medium-sized enterprises
Number of Overseas Affiliates Number of Overseas Employees
to small and medium sized enterprises.
303.0
Small firms
Medium-sized firms
thous. thous.6000400
thous. thous.
252.5 Large firms (right scale)
5250350
202.0 4500300
151.5 3750250 Small firmsMedium-sized firms
101.0
FY06 07 08 09 10
3000200
FY06 07 08 09 10
Large firms (right scale)
14Source: Ministry of Economy, Trade and Industry.
Chart 15The outstanding amount of Japan's foreign direct investment remains at a low
level compared with that of other advanced countries.
Outward Direct and Portfolio Investment Position Japan's Rate of Returnon Outward Direct Investment (by Region)%
p
tril. dollars, as of end-2011
15
18%
ChinaAsia (excluding China)WorldNorth America8
10
12
Portfolio investment
Direct investment
tril. dollars, as of end 2011
12
North AmericaEU
4
6
8
9
0
2
4
6
% of nominal GDPDirect
UnitedStates
UnitedKingdom
Japan Germany France Italy Canada
0
3Directinvestment
42 133 57 67 85 59 18
Portfolioinvestment
36 70 17 46 51 36 31
T t l 78 203 74 113 136 95 49
15Note: Rates of return on outward direct investment are calculated by dividing the amount of total direct investment income by the direct investment position for the previous year-end.
Sources: OECD; IMF; Bank of Japan.
06 07 08 09 10 11CYTotal 78 203 74 113 136 95 49
Chart 16In terms of the profitability of foreign investment,
Japan falls somewhat behind the United States.
Rate of Return on Outward Investment(Direct and Portfolio Investment)
Rate of Return on Direct Investment Rate of Return on Portfolio Investment
Japan falls somewhat behind the United States.
(Direct and Portfolio Investment)
12%
12%
12%
8
10
8
10
8
10
4
6
4
6
4
6
2
4
2
4
2
4
0
Uni
ted
Stat
es
Can
ada
Japa
n
Uni
ted
ingd
om
erm
any
Fran
ce
Ital
y
0
Uni
ted
ingd
omU
nite
dSt
ates
Can
ada
Japa
n
erm
any
Ital
y
Fran
ce
0
Japa
n
Can
ada
Fran
ce
erm
any
Uni
ted
Stat
es
Ital
y
Uni
ted
ingd
om
16Note: Figures are for 2011. Rates of return are calculated by dividing the amount of total investment income by the investment position for the previous year-end.Source: IMF.
C U Ki
Ge U Ki C
Ge C
Ge U Ki
Chart 17
Huge potential demand in the area of building core infrastructure exists in Asia.
Share of Companiesin Infrastructure Order (CY2011)
Investment Demand on Infrastructure in Asia
Japanese5
tril. dollars
Japanese firms9%
South Korean firms4%Others
4Replacement
B kd
Total: about 8 trillion dollars
4%
U.S. or Canadian
firms
Others9%
3
demand
New demand
Breakdownof transportation
Chinese firms20%
13%2
European firms45%
1
45%0
Ene
rgy
Ele
ctri
city
)
nspo
rtat
ion
mun
icat
ions
ater
sup
ply
/hyg
iene
Roa
ds
Seap
orts
Rai
lway
s
Air
port
s
17Note: Figures for investment demand are the accumulated value from 2010 to 2020. Sample countries are 30 countries or regions located in the Asia-Pacific region.Sources: Ministry of Economy, Trade and Industry; Asian Development Bank.
(E
Tra
n
Com
m Wa /
Chart 18
The labor participation rate of the elderly has increased in recent years.
Labor Participation Rate of the ElderlyLife Expectancy of 60 Year-Olds
60
65%
28
30years
55
60
24
26
28Female
Male
45
50 60 to 64 years old
65 to 69 years old22
24
35
4018
20
30
35
05 06 07 08 09 10 11 12CY
14
16
1960 65 70 75 80 85 90 95 2000 05 10CY
18Sources: Ministry of Internal Affairs and Communications; Ministry of Health, Labour and Welfare.
Chart 19
The labor participation rate of women remains at a relatively low level compared with other advanced economies
Labor Participation of Women in 2010
compared with other advanced economies.
%
90
100
60
70
80
40
50
60
Sweden
Germany
20
30
40 United Kingdom
United States
Japan
0
10
20
19Sources: Ministry of Internal Affairs and Communications; OECD.
015-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 over 65
Age
Chart 20
Expenditure in medical and nursing care has increased at a pace lower than that of population aging in Japan.
Population Aging and Expenditure in Medical and Nursing Care
Japan GermanyUnitedStates
FranceUnited
Kingdom
Population aged 65 and over(Change from 2000 to 2009, percent)
29 24 13 9 9
Expenditure inmedical and nursing care
(Change from 2000 to 2009, percent)
17 31 82 98 49( g , p )
20Sources: United Nations; OECD.
Chart 21
The service sector, including medical and welfare industries,are offering increased employment opportunities
Employees of Service Industries Employees of Medical and Welfare Industries10 thous. 10 thous 10 thous. 10 thous.
are offering increased employment opportunities.
4500
4550
6450
650010 thous. 10 thous.
800
850
4500
4550Service industries
Medical, health care and welfare i d t i ( i ht l )
10 thous.
4400
4450
6350
6400
700
750
4400
4450
industries (right scale)
4350
4400
6300
6350
650
700
4350
4400
4250
4300
6200
6250
All industries550
600
4250
4300
4150
4200
6100
6150
All industries
Service industries (right scale)
450
500
4150
4200
21Note: Service industries include all industries other than the manufacturing, agriculture, forestry and fisheries, mining, and construction industries.Source: Ministry of Internal Affairs and Communications.
41506100
02 03 04 05 06 07 08 09 10 11 12CY
4504150
02 03 04 05 06 07 08 09 10 11 12CY
Chart 22
Japan's secondary housing market is smaller than other countries.
70010 thous.
500
600Second-hand dwellings transactions
502.2 (78.8%)400
500New housing starts
300
15.1 (12.4%)137.9 (85.5%)100
200
106.1 (87.6%) 135.5 (21.2%)
23.4 (14.5%)
( )
0
Japan United States United Kingdom
22
Notes: 1. Figures are for 2007. Those in parentheses represent each share.2. For the United Kingdom, the number of second-hand dwellings is derived by subtracting the number of new dwellings from the total
housing market.Sources: Ministry of Land, Infrastructure, Transport and Tourism; U.S. Census Bureau; U.K. Department for Communities and Local Government.
Japan United States United Kingdom
Chart 23
The share of residential assets among Japanese household assets tends to be high.
Breakdown of Household Assets
73.5Japan
27 2United
27.2States
66.6Euro area
0 20 40 60 80 100Currency and deposits Government and Corporate BondMutual fund Equity
d i f d h fi i l
%
Note: Figures are as of end-2010.Sources: Ministry of Internal Affairs and Communications; FRB; Eurostat. 23
Insurance and pension fund reserves Other financial assetsFixed assets
Chart 24
Compared with the United States, Japanese large-cap firms have longer corporate histories
Establishment Year of Top 300 Large-Cap Firms
have longer corporate histories.
number of firms
60
70number of firms
40
50United States
Japan
30
40
10
20
0
-1889 189099
190009
1019
2029
3039
4049
5059
6069
7079
8089
9099
200009
2010-CY
24
Note: Figures are based on the top 300 large-cap firms as of end-2012. Those for Japan for 2000 onward, however, exclude the establishment of stock-holding companies.Source: Thomson Reuters.
-99 -09 -19 -29 -39 -49 -59 -69 -79 -89 -99 -09
Looking at developments in the stock market after the Lehman shock,comparatively small firms have been performing relatively well.
Chart 25
Difference in Market Capitalization Developments by Size
p y p g y
Market capitalization declinedMarket capitalization increased
29.4 70.650 billion yen
or above(762)
5 billion yen or above and
(762)
44.9 55.1or above and
less than50 billion yen
(1,440)
58.7 41.3Less than
5 billion yen(1,153)
0 10 20 30 40 50 60 70 80 90 100
(1,153)
%Notes: 1. Sample firms are those that were listed on stock exchanges in Japan as of end-August 2008 and which remained so through January 2013.2. Figures are comparisons of market capitalization from August 2008 to January 2013.3. Firms are categorized based on their market capitalization as of end-August 2008.4. Figures in parentheses represent the number of firms that apply to each category.
Source: Bloomberg. 25
%
Japan has prioritized securing employment,reducing costs largely by cutting back wages
Chart 26
8y/y % chg.
12%
reducing costs largely by cutting back wages.
Hourly WagesUnemployment Rates
6
8
Japan United States10
12
Japan United States
48
26
04
-4
-2
0
2
85 87 89 91 93 95 97 99 01 03 05 07 09 11CY85 87 89 91 93 95 97 99 01 03 05 07 09 11CY
26Sources: Cabinet Office; Ministry of Internal Affairs and Communications; BLS.
Chart 27 As firms' profitability has been declining recently,neither wages nor prices have changed materially.
Developments in Corporate Profits, Wages, and Prices following Cyclic Peaks1986/Q4 ~ 90/Q41971/Q4 ~ 73/Q3
200latest peak=100
200Wages
latest peak=100
120
140
160
180 Wages
CPI
Corporate profits
120
140
160
180 Wages
CPI
Corporate profits
80
100
120
-15 -12 -9 -6 -3 0 3 6 9 12 15
80
100
120
-12 -9 -6 -3 0 3 6 9 12 15 18T hP k
180latest peak=100
140latest peak=100
2002/Q1 ~ 07/Q4 2009/Q1 ~
quartersTrough:71/Q4
Peak:70/Q3
quartersTrough:86/Q4
Peak:85/Q2
100
120
140
160 Wages
CPI
Corporate profits
60
80
100
120
Wages
CPI
60
80
100
-5 0 5 10 15 20 25
20
40
60
-12 -9 -6 -3 0 3 6 9 12 15 18
CPI
Corporate profits
5 0 5 10 15 20 25
quartersPeak:00/Q4
Trough:02/Q1
quartersTrough:09/Q1
Peak:08/Q1
27
Note: "Wages" refers to hourly cash earnings (monthly labour survey base, establishment with 30 or more employees, all industries). "CPI" refers to CPI for all items. "Corporate profits" refers to operating profit figures in "Financial Statements Statistics of Corporations by Industry, Quarterly" (all size, all industries).
Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications; Ministry of Finance; Cabinet Office.
There is a clear positive correlation betweeninflation expectations and potential growth rates in Japan.
Chart 28
5
3
4y/y % chg. y/y % chg.
3
3
4 Potential growth rate (per capita, left scale)
y/y % chg. y/y % chg.Japan United States
3
4
1
2
3
2
1
2
3 Medium- to long-term inflation expectations(6 to 10 years ahead, right scale)
1
2
-1
0
1
0
1
-1
0
1
CY90 92 94 96 98 00 02 04 06 08 10 12CY90 92 94 96 98 00 02 04 06 08 10 12
54y/y % chg. y/y % chg.
54y/y % chg. y/y % chg.
United KingdomEuro Area
4
2
34
2
3
2
3
0
1
2
3
0
1
1-1CY90 92 94 96 98 00 02 04 06 08 10 12
1-1CY90 92 94 96 98 00 02 04 06 08 10 12Sources: Cabinet Office; Consensus Economics Inc., "Consensus Forecasts"; CBO; OECD, etc. 28
Changes in global investors' risk aversion significantly affect developments in financial markets.
Chart 29
Long Term Yield Spreads%
Beginning of 2011
July 24, 2012 Recent
Equity PricesLong-Term Yield Spreads
over German Government Bond YieldsBeginning of 2011
July 24, 2012 Recent
1.8 5.4 3.4
2.5 6.4 3.9
Italy
Spain
+3.6 -1.9
+3 9 2 5
10,398.1 8,488.1 11,254.0
11,670.8 12,617.3 13,900.1
Japan(Nikkei 225)
United States(Dow Jones)
-18.4% +32.6%
+8.1% +10.2%
9.6 26.8 9.7
Spain
Greece
+3.9 -2.5
+17.2 -17.1
2,839.4 2,151.5 2,570.5
100.0 85.3 95.4
Euro area(Euro STOXX)
Emergingeconomies
-24.2% +19.5%
-14.7% +11.9%
% chg., "+" means appreciation, "-" means depreciation
January 2011 → July 2012 July 2012 → January 2013
Equity Funds Inflows/OutflowsNominal Effective Exchange Rates
0 4
0.8 %
Yen + 6.3 - 13.9
U.S. dollar + 3.2 - 2.6
E 4 8 5 4 -0 4
0.0
0.4
Euro - 4.8 + 5.4
Pound sterling + 4.4 - 2.3
Korean won - 1.2 + 6.5 -1.2
-0.8
-0.4
Emerging economiesAdvanced economies
29
Notes: 1. Figures for equity prices for emerging economies are taken from the MSCI Emerging Markets Index, adjusted such that the figure for the beginning of 2011 is 100.2. Figures for "Equity Funds Inflows/Outflows" are calculated using each fund's net money flow data divided by its total assets.
Sources: Bloomberg; EPFR Global; BIS.
11 12 13CY
Exports and production increasedduring the mid-2000s when the yen depreciated.
Chart 30
110
120
120
140Real exports (left scale)Industrial production (right scale)
s.a., CY 2005=100s.a., CY 2005=100
80
90
100
80
100
p ( g )
60
70
40
60
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12CY
60Nominal effective exchange rate
CY 2005=100, reversed
80
100
Nominal effective exchange rateReal effective exchange rate
Yen'sdepreciation
120
140
160
depreciation
Yen'sappreciation
30Sources: Ministry of Economy, Trade and Industry; Bank of Japan; BIS.
16090 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13CY
The medium- to long-term growth rate has not risen.Chart 31
Foreign Exchange Rates, Exports, and Real GDP Growth
606y/y % chg. CY 2000=100, reversed
70
80
4
90
1000
2
100
110-2
0
Contribution to real GDP growth from net exports Yen's
120
130-4
Contribution to real GDP growth from domestic demand
Nominal effective exchange rate (right scale)
Yen s depreciation
Y '
Notes: 1. The nominal effective exchange rate is an indicator that measures the overall value of individual currencies. It is derived by calculating the weighted average of
140-6
00 01 02 03 04 05 06 07 08 09 10 11 12
Real effective exchange rate (right scale)
CY
Yen's appreciation
31
each currency's exchange rate against other currencies using the annual value of each country's trade with its counterparties as its weights.2. The real effective exchange rate is an indicator of a country's overall international competitiveness, calculated as follows. First, each of the exchange rates of the
country's currency against other currencies (i.e., nominal exchange rates) is deflated by the price indices of those countries to calculate the real exchange rate. Then, the weighted average of the real exchange rates is calculated using the annual value of each country's trade with its counterparties as its weights.
Sources: Cabinet Office; BIS.
Money is increasing.Chart 32
Relationship between Money and Prices200140
Real GDP CPIMoney stock Amount outstanding of lending
CY 2000=100 CY 2000=100
150
175
120
130 Monetary base (right scale)
125110
75
100
90
100
00 01 02 03 04 05 06 07 08 09 10 11 12CY 00 01 02 03 04 05 06 07 08 09 10 11 12CY
1
2
CPI (less fresh food)
y/y % chg.
-1
0
1 CPI (less fresh food)
32Sources: Cabinet Office, Ministry of Internal Affairs and Communications; Bank of Japan.
-2
00 01 02 03 04 05 06 07 08 09 10 11 12CY
The Bank of Japan has provided considerable funds through large-scale purchases of JGBs.Private financial institutions have been increasing their JGB holdings rather than lending
Chart 33
Private financial institutions have been increasing their JGB holdings rather than lending.
Deposit-Taking Financial InstitutionsAssets
Bank of JapanAssets Liabilities and Net Assets
1 600tril. yen
160tril. yen
160tril. yen
1,400
1,600
140
160
140
160
1,000
1,200
100
120
100
120
600
800
60
80
60
80
200
400
20
40
20
40
0
200
1998/12 2007/12 2012/9
0
20
1998/12 2007/12 2012/9
0
20
1998/12 2007/12 2012/9
33Note: Figures are as of end of month.Source: Bank of Japan.
LendingJGBsCurrent deposits at the BOJOthers
Banknotes Current deposits
Others
JGBs
Others
The Bank of Japan will supply additional funds amounting to over 60 trillion yen in the next two years.
Chart 34
Amount Outstanding of "Asset Purchase Program" and "Loan Support Program"
130
140tril. yen
110
120
130Loan Support Program (schedule)
Loan Support Program (actual)
h ( h d l )
80
90
100Asset Purchase Program (schedule)
Asset Purchase Program (actual)Aiming to achieve the price stability target, the Bank will continue a virtually zero interest rate policy
60
70
80 and purchases of financial assets as long as the Bank judges it appropriate to continue with each policy measure respectively.
30
40
50policy measure respectively.
For some time, the Bankwill purchase financial
10
20
30assets of about 13 trillion yen, 2 trillion yen of which is JGBs, every month.
34
0CY2010 2011 2012 2013 2014