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T d S G hToward Stronger Growth:Challenges facing Japan's Economyg g p y
Speech at a Meeting Held by the Yomiuri International Economic Society in Tokyo
September 6, 2012
Masaaki Shiraka aMasaaki ShirakawaGovernor of the Bank of Japan
ContentsIntroduction1. Recent Developments in Japan's Economy2 Mechanism for Economic Recovery in Japan before the Lehman Shock2. Mechanism for Economic Recovery in Japan before the Lehman Shock3. Overseas Economies
- Current Situation and Outlook for the Overseas EconomiesEffect of the Bursting of the Credit Bubble on the Overseas Economies- Effect of the Bursting of the Credit Bubble on the Overseas Economies
- European Debt Problem and Its Challenges4. Growth Potential
J ' G th P t ti l- Japan's Growth Potential- Measures to Raise Japan's Growth Potential
5. Deflation6 S Y6. Stronger Yen
- Recent Developments in Foreign Exchange Rate and Its Background- Effects of Foreign Exchange Rate Movements and Responses
7. Fiscal Sustainability8. The Bank's Conduct of Monetary Policy
- Pursuing Powerful Monetary Easing
1
- Accommodative Financial Conditions and Measures to Take Advantage of These ConditionsConcluding Remarks
World GDP
Chart 1
World GDP
135real, CY 2007=100
125
130World
Advanced economies
115
120 Emerging economies
105
110
100
105
90
95
0 7 0 8 0 9 1 0 1 1 12CY
2
Source: IMF.
0 7 0 8 0 9 1 0 1 1 12CY
Real GDP in the United States and Euro Area: Comparison with Japan
Chart 2
Real GDP in the United States and Euro Area: Comparison with Japan
United States Euro Area
120
130
120
130
110 110
100 100
80
90
United States (CY 2006=100)
Japan (CY 1990 100) 80
90
Euro area (CY 2006=100)
70
80
00 02 04 06 08 10 12
Japan (CY 1990=100)
US
70
80
00 02 04 06 08 10 12
Japan (CY 1990=100)
EU:
3Sources: BEA; Eurostat; Cabinet Office.
00 02 04 06 08 10 12JP :
US :84 86 88 90 92 94 96 98 00 02 04 06 08 10
00 02 04 06 08 10 12JP :EU:
84 86 88 90 92 94 96 98 00 02 04 06 08 10
Japan's GDP Growth Rate and Business Conditions
Chart 3
Japan s GDP Growth Rate and Business Conditions
60
7010y/y % chg. D.I., % points
Forecast
"Fa
30
40
50
60
6
8 Real GDPBusiness conditions/manufacturing (right scale)Business conditions/nonmanufacturing (right scale)
Forecast avorable"
10
20
30
2
4
-20
-10
0
4
-2
0
"
-50
-40
-30
8
-6
-4
"Unfavora
-70
-60
-10
-8
90 92 94 96 98 00 02 04 06 08 10 12
able"
CY
4
Notes: 1. Shaded areas indicate periods of recession (according to the Cabinet Office).2. Figures for business conditions are based on the Tankan, aggregates of all business sizes.
Sources: Cabinet Office; Bank of Japan.
Real GDP Growth Rate of the Global Economy
Chart 4
Real GDP Growth Rate of the Global Economy
6y/y % chg.
Average for CY 2000-2007: Average for CY 2004-2007:
5
g+ 4.2% + 5.0%
3
4
2
Average for CY 1990-1999:
1
Average for CY 1990 1999: + 3.0%
-1
0
5Note: Figures are calculated using GDP based on purchasing power parity (PPP) shares of the world total from the IMF. Source: IMF.
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11CY
Effective Exchange Rates of the Yen
Chart 5
50
60Real
CY 2000=100, reversed
70
80
Nominal(Real)Average for
CY 1994-2012
80
90
100
110
Depreciation
(Nominal)Average for
120 Appreciation
ve ge oCY 1994-2012
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 each currency's exchange rate against other currencies using the annual value of each country's trade with its counterparties as its weights.
130
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12CY
6
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 the country's trade with its counterparties as its weights.
Source: BIS.
Exchange Rate and Real Exports
Chart 6
Real ExportsTransport Equipment,
Capital Goods and Parts
70180CY 2003=100 CY 2003=100, reversed
70180CY 2003=100 CY 2003=100, reversed
7
80
90140
160Increase
Decrease
70
80
90140
160
80
100
110
12080
100
120
Real export
Real effective exchange rate (right scale)
Depreciation
Appreciation
100
110
12080
100
120Transport equipment, capital goods and partsReal effective exchange rate (right scale)
IT-Related Goods Consumer Goods
1208003 04 05 06 07 08 09 10 11 12CY
1208003 04 05 06 07 08 09 10 11 12CY
CY 2003=100 CY 2003=100 reversed CY 2003=100 CY 2003=100 reversed70
80
90140
160
180CY 2003=100 CY 2003=100, reversed
70
80
90140
160
180CY 2003=100 CY 2003=100, reversed
90
100
110100
120
140
IT-related goods
R l ff i h ( i h l )
90
100
110100
120
140
Consumer goods
7Sources: BIS; Ministry of Finance; Bank of Japan.
1208003 04 05 06 07 08 09 10 11 12
Real effective exchange rate (right scale)
CY12080
03 04 05 06 07 08 09 10 11 12
Real effective exchange rate (right scale)
CY
GDP of Advanced Economies
Chart 7
GDP of Advanced Economies
Real GDP Real GDP per Capita Real GDP per Working-Age Person
104JapanUnited StatesE
CY 2007=100
103
104JapanUnited States
CY 2007=100
100
101CY 2007=100
100
102 Euro areaUnited Kingdom
100
101
102 Euro areaUnited Kingdom
98
99
98
97
98
99
96
97
94
96
94
95
96
93
94
95
JapanUnited States
9207 08 09 10 11 12CY
92
93
07 08 09 10 11 12CY
92
93
07 08 09 10 11 12
Euro areaUnited Kingdom
CY
8
Notes: 1. A working-age person refers to those between 15 and 64 years old.2. Figures for 2012 are January-June averages. Figures for the population for 2012 are calculated using the growth rate for 2011.
Sources: World Bank; BEA; Eurostat; ONS; Cabinet Office.
GDP of Japan and China
Chart 8
GDP of Japan and China
Real GDP Growth Nominal GDP per Capita Nominal Gross Fixed Investment over Nominal GDP
40
45 thous. U.S. dollars
45
50%
18
20
China Japan
% chg.
30
35 China Japan
35
40
45
12
14
16p
Average Growth inCY 1990-2011
(China): +10.1%
15
20
25
30
35
6
8
10
5
10
20
25
China Japan
0
2
4 Average Growthin CY 1956-1970(Japan): +9.7%
1955 65 75 85 950
1990 00 1000JP :
CN: CY1955 65 75 85 95
15
1990 00 1000JP :
CN: CY1955 65 75 85 95
-2
1990 00 1000CY
JP :CN:
9
Sources: Cabinet Office; National Bureau of Statistics of China.
Demographic Changes in Japan and China
Chart 9
Demographic Changes in Japan and China
Growth of Working-Age Population
Share of Working-Age Population
Share of Population over 65p p
3
4
Japan
China
y/y % chg.80
Japan
%
35
40
Japan
%
2
3 China
Forecasts by United Nations
70
75 China
25
30
35China
1 65
15
20
25
-1
0
55
60
10
15
-2
1
195565 75 85 95 05 15 25 35 4550
55
195565 75 85 95 05 15 25 35 450
5
195565 75 85 95 05 15 25 35 45CY
10Source: United Nations.
CY CY CY
Population Influx into Metropolitan Areas and Working-Age Population
Chart 10
Population Influx into Metropolitan Areas and Working-Age Population
Japan Chinamil. persons annual avg., % changes from previous period, % points annual avg., %
2.5
3.0
300
400
Influx into metropolitan areas
Working-age population (right scale)4
5
4
5g p p , p annual avg., %
1.5
2.0
200
300
3
4
3
4
0.5
1.0
100 22
-0 5
0.0 0 11
-1.0
-0.5
-100
1
0
1
0Urbanization rate
Working-age population (right scale)
11Sources: World Bank; United Nations; National Institute of Population and Social Security Research.
-1.5 -200
1955 60 65 70 75 80 85 90 95 2000 05 10CY
-1-1
1965 70 75 80 85 90 95 2000 05 10 15 20CY
Share of Countries in World GDP
Chart 11
Share of Countries in World GDPCY2000 CY2011
UnitedLatin
America OthersStates22%
Others 23%
United States31%
India1%
America6% 14%
Euro area
Latin America
8%
NIEs/ASEAN4
5%U.K. 22%
JapanChina10%NIEs/
India2%Euro area
U.K.
Japan15%
China 4%
p8%
10% NIEs/ASEAN4
5%
24%
12
Notes : 1. Converted by market nominal exchange rates.2. Euro area is based on EU17.3. The NIEs consist of South Korea, Taiwan, Hong Kong, and Singapore. ASEAN4 refers to Thailand, Indonesia, Malaysia, and the Philippines.4. Latin America refers to Brazil, Mexico, Argentina, Colombia, Chile, Peru, and Venezuela.
Source: IMF.
Developments in Japan's Real GDP
Chart 12
Developments in Japan s Real GDP
14 y/y % chg.
9.7%
10
12 1956-1970
4
6
8 5.2%1970s
0
2
4
4.4%1980s
-4
-2
0 1.5%1990s
0.6%2000s
-8
-6
13Source: Cabinet Office.
56 60 64 68 72 76 80 84 88 92 96 00 04 0819
Decomposition of Real GDP Growth in Japan
Chart 13
Decomposition of Real GDP Growth in Japan
6
Productivity growth (the rate of growth in real GDP per worker)
avg., y/y % chg.
4
5 Productivity growth (the rate of growth in real GDP per worker)
Rate of change in the number of workers
Real GDP growth rate
2
3
+0.9%
+0.8% 1
2 Forecast
+0.5% -0.3%
-0.6% -0.8%-1
0
-1.2%-2
1970s 1980s 1990s 2000s 2010s 2020s 2030s
14
Note: The rates of change in the number of workers from fiscal 2011 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/sexgroup remain the same as those in 2010).
Sources: Cabinet Office; Ministry of Internal Affairs and Communications; National Institute of Population and Social Security Research.
Comments on Prices in the Opinion Survey on the General Public's Views and Behavior
Chart 14
Public s Views and BehaviorComments on the Price Rise
[Rather unfavorable][Rather favorable][Neither favorable nor unfavorable]
1.2
13 1
13.2
84.1
85.3
Mar 2012
Dec. 2011
2.1
2.0
12.4
13.1
84.6
84.1
June 2012
Mar. 2012
Comments on the Price Decline0% 20% 40% 60% 80% 100%
[Rather favorable] [Rather unfavorable][Neither favorable nor
unfavorable]
28 8
35.3
39 9
36.7
29 9
27.3
Mar 2012
Dec. 2011
[Rather favorable] unfavorable]
32.4
28.8
35.5
39.9
30.5
29.9
June 2012
Mar. 2012
Note: The Bank conducts its quarterly Opinion Survey on the General Public's Views and Behavior in order to grasp how the public's current impression of household circumstances and changes in financial and economic conditions affect their perceptions and actions.
Source: Bank of Japan. 15
0% 20% 40% 60% 80% 100%
Nominal Effective Exchange Rates
Chart 15
Nominal Effective Exchange Rates
60CY 2000=100, reversed
70
80
90
100
110
120Depreciation
130
140
Yen
U.S. dollar
Euro
Depreciation
150
160
00 01 02 03 04 05 06 07 08 09 10 11 12
Swiss franc
Korean won
CY
Appreciation
16
Note: 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 each currency's exchange rate against other currencies using the annual value of each country's trade with its counterparties as its weights.
Source: BIS.
00 01 02 03 04 05 06 07 08 09 10 11 12CY
Foreign Exchange Transactions and Trade Volume
Chart 16
Foreign Exchange Transactions and Trade Volume
33.2
Yen's foreign exchange
market turnoverturnover
0 6Trade value of
0.6Japan
0 5 10 15 20 25 30 35 40tril. Yen
17
Notes: 1. Figures are as of fiscal 2010. The foreign exchange market turnover is the transaction value of the yen. The trade value is that of Japan'sexports and imports based on its nominal GDP.
2. Daily averages. The trade value is calculated by dividing the total value for 2010 by the number of business days (20 business days times 12 months).
Sources: BIS; Cabinet Office; Bloomberg.
Chart 17
Exchange Rates and Exports of Switzerland and JapanExchange Rates and Exports of Switzerland and Japan
Nominal Effective Exchange Rate Value of Exports
70
80
CY 2000=100, reversed
300
350
Japan
CY 2000=100
90
100 250
300 p
Switzerland
110
120
130 150
200
130
140
150
Yen
Swiss franc
Depreciation
100
150
160
170
Appreciation
0
50
18
Note: Value of exports is calculated on a U.S. dollar basis.Sources: Cabinet Office; Eurostat; Bloomberg; BIS.
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
International Competitiveness Coefficient
Chart 18
International Competitiveness Coefficient
0.8
1.0
0 4
0.6
0.8
0 0
0.2
0.4
-0.2
0.0
T t i t
-0.6
-0.4 Transport equipmentGeneral industrial machinerySemiconductor devices, etc.Television receivers
-1.0
-0.8
92 94 96 98 00 02 04 06 08 10
Television receiversHousehold-type electrical equipment
CY
19
Note: International Competitiveness Coefficient (ICC) equals net export value divided by the sum of export value and import value. The closer the value of ICC is to one, the greater the competitiveness.
Source: United Nations.
92 94 96 98 00 02 04 06 08 10CY
JGB Yields and Interest Payments on JGBs
Chart 19
JGB Yields and Interest Payments on JGBs
JGB Yields Interest Payments on JGBs
6 5% tril yen tril yen
5.5
6.0
6.5 Weighted average yield of previously issued JGBs
Newly-issued yields of 10-year JGBs
Newly-issued yields of 2-year JGBs 700
80010
Total amount of JGBs
tril. yen tril. yen
4.0
4.5
5.0
600
8
9Yearly payments on JGBs
2 5
3.0
3.5 500
7
8
1.5
2.0
2.5
400
6
7
0.0
0.5
1.0
200
300
5
20Source: Ministry of Finance.
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11FY 00 01 02 03 04 05 06 07 08 09 10 11FY
Japan's Fiscal Revenue/Expenditure, Inflation, and Real GDP Growth
Chart 20
p p , ,< GDP Deflator and Revenue > < GDP Deflator and Expenditure >
4GDP deflator, y/y % chg.
4GDP deflator, y/y % chg.
0
2
0
2
-4
-2
15 10 5 0 5 10 15
-4
-2
10 5 0 5 10
< Real GDP Growth Rate and Revenue > < Real GDP Growth Rate and Expenditure >
6real GDP growth rate, y/y % chg.
-15 -10 -5 0 5 10 15revenue, y/y % chg.
-10 -5 0 5 10expenditure, y/y % chg.
6real GDP growth rate, y/y % chg.
0
2
4
0
2
4
-6
-4
-2
10 5 0 5 10
-6
-4
-2
15 10 5 0 5 10 15
Note: The sample period is since fiscal 1991. Figures for revenues and expenditures are those of central and local governments, which include the payment/receivable of interest.
Source: Cabinet Office. 21
-10 -5 0 5 10expenditure, y/y % chg.
-15 -10 -5 0 5 10 15revenue, y/y % chg.
Asset Purchase Program
Chart 21
Breakdown of the Asset Purchase ProgramMaximum Amount and Actual Amount of Increase
in the Size of the Asset Purchase Program
t il tril. yen
Cumulative
70
80tril. yen
Feb 2012
Jul.2012Removed the minimum bidding yield for outright
purchasesof T-Bills and CP
Apr.201270 tril.yen
(end-Jun.2013)Jun.2013
Started in Oct.2010
Latest Jul.2012
Cumulative change in amount
(Intended timescale for completing the purchases) (End-Dec 2011) (End-Jun 2013)
(A) (B) (B) – (A)
60
70
Oct.201155 tril.yen
(end-Dec 2012)
Feb.201265 tril.yen
(end-Dec.2012)
Dec.201265 tril.yen
70 tril.yenTotal size
About 35
About 70
About +35
Asset purchases 5.0 45.0 +40.0
50Mar.201140 tril.yen
Aug.201150 tril.yen
(end-Dec.2012)
(end-Dec.2012)JGBs 1.5 29.0 +27.5
T-Bills 2.0 9.5 +7.5
CP 0.5 2.1 +1.6
40 Pursuing powerful monetary easing in a
ti
y(end-Jun.
2012)Started in Oct.201035 tril.yen(end-Dec.
2011)
Corporate bonds 0.5 2.9 +2.4
ETFs 0.45 1.6 +1.15
0 0 0 12
20
30Maximum amount of the Asset Purchase ProgramActual amount of increase in the size of the Asset Purchase Program
continuous manner
Schedule
J-REITs 0.05 0.12 +0.07
Fixed-rate operation 30.0 25.0 - 5.0
Three-month term 20.0 ― ―
22Note: Dates in parentheses indicate the intended timescale for completing the increase.
20
10 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6
g
CY2010 2011 2012 2013Six-month term 10.0 ― ―
Japan's Corporate Financial Conditions
Chart 22
Domestic Banks' Average Contracted Interest Rates ROA and Paid Interest Rate of Japanese Firms
1.7
1.8
Long-term
%
7
8ROA (operating profits/total assets)
Paid interest rate (interest expense/interest-
s.a., %
1.5
1.6Long term
Short-term5
6
Paid interest rate (interest expense/interestbearing debt)
1 2
1.3
1.4
3
4
1 0
1.1
1.2
1
2
0.9
1.0
0 7 0 8 0 9 1 0 1 1 1 2CY
0
85 87 89 91 93 95 97 99 01 03 05 07 09 11CY
23
Note: Average contracted interest rates are the six-month backward moving averages on new loans.Sources: Ministry of Finance; Bank of Japan.
Fund Provisioning to Support Strengthening the Foundations for Economic Growth
Chart 23
(Total Size: 5.5 tril. yen)
Main rulesSpecial rules for equity investments and asset-
based lending
Special rules for small-lot investments and loans
Special rules for U.S. dollar lending arrangementsbased lending arrangements
Time of establishment June 2010 June 2011 March 2012 April 2012
Maximum amountoutstanding 3.5 tril. yen 0.5 tril. yen 0.5 tril. yen 12 bil. U.S. dollarsoutstanding
Maximum amount of loans to each
counterparty
150 bil. yen (when combined with small-lot investments and loans)
50 bil. yen
150 bil. yen (when combined with
investments and loans made under main rules)
1 bil. U.S. dollars
)
Eligible investments and
loans
Those with a size of 10 mil. yen or more
Equity investments and ABL with a size of 1 mil.
yen or more
Those with a size of 1 mil. yen or more but less
than 10 mil. yen
Those denominated in foreign currencies with a size of 100 thous. U.S.
dollars or more
Duration of loans Maximum 4 years (including rollovers)
Maximum 4 years (including rollovers)
Maximum 4 years (including rollovers)
Maximum 4 years (including rollovers)
Loan ratesThe Bank's target for the
policy rate( )
The Bank's target for the policy rate
( )
The Bank's target for the policy rate
( )
6-month U.S. dollar LIBOR(0.1 percent per annum) (0.1 percent per annum) (0.1 percent per annum) LIBOR
Deadline for applications for new
loansMarch 31, 2014 March 31, 2014 March 31, 2014 March 31, 2014
Amount
24
Amount outstanding
(as of August 31, 2012)
3,131.4 bil. yen 106.9 bil. yen 3 bil. yen ――
Credit Ratings of Financial Institutions
Chart 24
Credit Ratings of Financial Institutions
United States Europe Japan
19
20Aaa
Aa119
20Aaa
Aa1 19
20Aaa
Aa1
17
18Aa2
Aa317
18Aa2
Aa3 17
18Aa2
Aa3
16
17
Deutsche Bank (A2)
A1
A215
16
17Aa3
A1
15
16
17
MUFG (Aa3)
A1
A2
14
15 BNP Paribas (A2)
UBS (A2)
A2
A314
15
Citibank (A3)
JP Morgan Chase Bank (Aa3)
A2
A3 14
15Mizuho/Mizuho Corporate Bank (A1)SMBC (Aa3)
A2
A3
13
00 02 04 06 08 10 12CY
13
00 02 04 06 08 10 12CY
13
00 02 04 06 08 10 12CY
25
Notes: 1. Ratings are based on long-term credit ratings issued by Moody's.2. Ratings in parentheses are most recent ratings.
Source: Moody's.