[Speech]
Recent Economic and Financial Developments and Monetary Policy
日本語
Speech at a Meeting with Business Leaders in Yamanashi Prefecture (Held in Kofu)
Takehiro Sato
Member of the Policy Board
June 10, 2015
Full Text [PDF 754KB]
Figures [PDF 704KB]
Contents
Introduction
I. Recent Economic and Financial Developments in Japan and Abroad
A. Developments in the World Economy
B. Developments in Global Financial Markets
C. Developments in Japan's Economy
D. Developments in Prices
II. Future Conduct of Monetary Policy
A. The Price Stability Target and Conduct of Monetary Policy
B. Effects of QQE after Its Expansion
C. Sustainability of the Bank's Massive Asset Purchases
D. Examination of Side Effects
E. Importance of Efforts toward Fiscal Consolidation
Concluding Remarks: Economic Activity in Yamanashi Prefecture
Introduction
Thank you for giving me this opportunity
to exchange views with people representing the political, economic, and
financial arena of Yamanashi Prefecture.
I would like to take this opportunity to express my sincere gratitude
for your cooperation with the activities of the Bank of Japan's Kofu Branch.
In today's speech, I will begin by
focusing on economic and financial developments in Japan and abroad, as well as
the Bank's recent monetary policy. I
will then touch briefly on the economy of Yamanashi Prefecture. Following my speech, I would like to hear
your views on actual conditions in the local economy and on the Bank's conduct
of monetary policy.
I. Recent Economic and Financial Developments in
Japan and Abroad
A. Developments in the World Economy
The world economy has been sluggish,
despite the decline in energy prices (Chart 1).
In the January-March quarter of 2015 in particular, it exhibited signs
of a slowdown, as the growth rate of the U.S. economy turned negative due to the
effects of the severe winter weather and the labor disputes at West Coast ports,
and as the growth rate of the Chinese economy remained at around 7
percent. These developments in the world
economy affected Japan's economy to some degree as well.
The decline in energy prices since 2014
was initially expected to have positive effects on the world economy, but
negative effects seem to have preceded them -- such as the decline in income in
commodity-exporting countries and the decrease in investment in resource
development -- due to the rapid pace of the energy price declines. As for the outlook, the world economy is
expected to see a moderate increase in its growth rate, with the recent
improvement in soft data reflected in hard data, as positive effects of the
decline in energy prices -- such as an increase in real income in the
energy-consuming countries -- permeate gradually.
As for the U.S. economy, a substantial
deceleration in growth in the January-March quarter has been observed three
times in the past five years. The
deceleration occurred for different reasons each time, but there seems to be a
seasonal pattern of some kind. Besides the
severe winter weather and the labor disputes at West Coast ports, the
appreciation of the dollar also casts a shadow on manufacturers' sentiment, thereby affecting indicators of
business fixed investment. The effects
of the decline in energy prices on investment in resource development are also
evident (Chart 2). In contrast,
reflecting the improvement in the employment situation and the decline in
gasoline prices, consumer sentiment has generally stayed at a high level. It is a matter of concern that, despite the
favorable sentiment, private consumption remains lackluster and growth in the
April-June quarter of 2015 has been sluggish so far. However, the economy is expected to gradually
return to a recovery path led by private consumption on the back of a moderate
increase in wages as the employment situation continues to improve -- following
more or less the same pattern of the past five years. The inflation rate has been stable due to the
decline in energy prices, but the slack in the labor market seems to be
diminishing to a certain degree, reflecting the decline in the unemployment
rate, although there are such problems as the increases in the number of
long-term unemployed workers and part-time workers. In this situation, the Federal Reserve (Fed)
has been communicating to the public a path toward raising the policy interest
rate, but is taking a flexible and cautious stance that the exact timing will
depend on future economic indicators.
In Europe,
manufacturers' sentiment has been picking up in reflection of the
decline in energy prices and the depreciation of the euro, and consumer
sentiment has also started to recover (Chart 3). With the improvement in soft data, the
pick-up in hard data has become evident, as seen, for example, in positive GDP
growth for eight consecutive quarters.
The inflation rate, which temporarily had been negative, has recovered
to around 0 percent. That being said, given
that the effects of the debt problem remain, the risk of prolongation of low
inflation leading to a postponement of investment and consumption has receded
but seems to still exist, and I have been monitoring these developments
closely. Meanwhile, unconventional
monetary policy measures introduced by the European Central Bank (ECB)
initially had significant effects on the foreign exchange and bond markets; however, these markets have recently
shown large fluctuations. Many points are
being made regarding the sustainability of such large-scale asset
purchases, and I will pay attention to any progress made regarding this matter.
With
regard to the Chinese economy, the GDP growth rate for the January-March
quarter of 2015 decelerated to 7.0 percent.
Looking at recent developments in electricity consumption and railway
freight turnover, my impression is that actual economic growth could be slower
than suggested by the GDP figures, although we should not make a decisive
judgment as these developments may reflect the effects of the shift toward a
service economy and the progress in structural reforms that are promoted by the
Chinese government (Chart 4). Moreover,
manufacturers' sentiment has been dampened further. Movements toward inventory adjustments in
Japan -- in materials and related goods such as iron and steel -- seem to be
partly affected by the slowdown in the Chinese economy.
As for the outlook of the Chinese
economy, the growth rate is likely to remain downward-biased, owing to a sharp
change in the demographic situation and the resultant fall in the potential
growth rate. However, given the typical
pattern observed over the past few years -- in which, once the economy is
projected to deviate downward from the growth target, the government implements
small-scale economic packages, thereby achieving the pick-up in the economy --
the same developments generally seem to be taking place this year as well. Meanwhile, attention should be paid to the
point that downward pressure on inflation has been increasing, as evidenced by
the year-on-year rate of change in the GDP deflator for the January-March
quarter of 2015 turning negative for the first time since 2009.
B. Developments in Global Financial Markets
Taking
into account the developments in the world economy that I have illustrated, let
me turn to developments in global financial markets for the time being. The first key point is how a hike in the
policy rate in the United States affects global financial markets. In light of the recent U.S. economic
indicators, the timing of a hike in the target federal funds rate that market
participants expect is either moving forward or backward. On the other hand, the Fed is working to let
the markets factor in a rate hike in the near future while cautiously avoiding providing
decisive information. Judging from
pricing in the federal funds futures market, this intention by the Fed has
generally permeated the markets, and the difference in views between Federal
Open Market Committee (FOMC) participants and the markets -- which was seen
some time ago -- is starting to be resolved (Chart 5). Of course, if market participants begin to
identify the specific timing of a rate hike, global financial markets might
show a different reaction from the past.
This concern seems to have materialized in the market reaction when Fed
Chair Janet Yellen mentioned the valuation in the stock and bond markets in
early May 2015. Meanwhile, as a result
of a number of financial regulations, major market makers' risk-taking
activities have been restricted, inducing concern regarding a decline in
liquidity even in the U.S. Treasury markets.
Given these circumstances, I would like to monitor carefully whether,
when the timing of a rate hike becomes clearer in the future, a change in the
international flow of funds will not cause any significant repricing or
unexpected knock-on effects in various asset markets.
The
second key point in terms of developments in global financial markets is the
effects of large-scale asset purchases by the ECB (Chart 6). When these purchases were first implemented,
it was considered that the effects of the purchases had already been factored
in. However, even after the
implementation, long-term interest rates in European countries fell markedly;
for example, 10-year German bund yields declined to around 0 percent
temporarily. At the same time, the euro
depreciated further. Since late April, however
-- probably because of a reaction to the sharp drop in interest rates --
long-term interest rates in Germany have risen above the level seen before the implementation
of the ECB's asset purchases, and thus have exhibited rather volatile
movements. This increase in volatility
appears to be related to a decline in market liquidity, resulting from the
scale of the ECB's purchases being massive relative to the size of sovereign
bond markets. Also, in Japan, a rise in
volatility in long-term interest rates was observed both after the introduction
of quantitative and qualitative monetary easing (QQE) in April 2013 and following
the expansion of QQE at end-October 2014.
Specifically, contrary to the initial intention, yields on 10-year Japanese
government bonds (JGBs) temporarily jumped up somewhat significantly
immediately after the implementation of QQE.
In contrast, they declined further after the expansion of QQE and have recently
returned to around the level seen before such expansion. These fluctuations in long-term interest
rates appear to be attributable not only to monetary policy but also to external
factors, and therefore should be assessed carefully. That being said, if the effects of monetary
policy are produced by the declines in nominal or real interest rates, due
attention should be paid to the possibility that liquidity premiums in the JGB
markets -- brought about by the Bank's massive JGB purchases -- might in part
be weakening the effects of monetary policy.
There is also a possibility that the fluctuations in long-term interest
rates reflect the move to factor in improvement in the outlook for economic
activity and prices.
The
third key point is also related to European factors -- namely, developments in
political and economic conditions in Greece.
As the Greek government faces severe financing needs, negotiations
regarding financial assistance to the country continue. At this point, possible effects on peripheral
European countries are limited. However,
I would like to monitor future developments whether or not any unexpected
knock-on effects emerge in global financial markets.
C. Developments in Japan's Economy
Looking
at developments in Japan's economy for the January-March quarter of 2015, not
only business fixed investment but also exports and production maintained their
moderate improving trend. Private
consumption and imports were resilient and final demand remained firm. For the April-June quarter, the economy is
expected to continue recovering moderately because, for example, it seems that
private consumption has been resilient since March, although production is
projected to be more or less unchanged, mainly due to inventory adjustments in
some industries (Chart 7). Expectations
for somewhat higher growth in the world economy will also serve as a tailwind
for Japan's economy. The virtuous cycle
from income to consumption and investment will likely operate, with its
certainty gradually increasing, on the back of the firm employment situation
and favorable corporate results.
However, we should probably be mindful of the risk that the increase in
households' real purchasing power and the improvement in corporate profits,
both brought about by lower crude oil prices, will not lead to an expansion of
spending by as much as expected, and consequently pressure for excess savings
-- or for an increase in current account surplus -- will not be alleviated
easily.
With
regard to the employment and income situation, which forms the basis for the
virtuous cycle that I just mentioned, wages continue to rise moderately in a
situation where labor market conditions have become increasingly tight, even
after the year-on-year growth in total cash earnings was revised downward due
to the replacement of samples in the
Monthly
Labour Survey
(Chart 8). Wages are
expected to continue increasing moderately, reflecting a base pay increase that
is likely to take place for a second consecutive year. Thus, private consumption is expected to
reach a moderately higher level as the effects of a decline in real income due
to the consumption tax hike in April 2014 dissipate gradually.
From
a somewhat longer-term perspective, I focus on the pace of increase in firms'
productivity, which is the basis for a sustainable rise in wages, as well as on
the impact of the aging population. In
order for consumption to maintain its uptrend in the medium term, it would be
necessary to have a sustainable recovery in real wages of about 60 million
workers that could offset developments in real income of about 40 million
pensioners. The pace of recovery in
private consumption will likely remain very moderate from a somewhat
longer-term perspective, even considering that wages will gradually see a
higher rate of increase in accordance with a rise in productivity brought about
by an increase in business fixed investment, and that confidence in the
sustainability of the social security system will increase because of the
implementation of related reforms.
Regarding
private business fixed investment, such investment on a GDP basis has been slow
to increase so far despite a pick-up in monthly indicators, such as shipments
and the aggregate supply of capital goods, and the firmness in investment plans
suggested by the results of the
Tankan
(Short-Term Economic Survey of Enterprises in Japan). However, fixed investment overseas has been
marking consecutive double-digit increases recently, suggesting that firms'
appetite for fixed investment on a consolidated basis has been robust for some
time (Chart 9). What matters is not
whether firms will increase fixed investment further, but whether they will
make investments in Japan. In this
regard, domestic fixed investment so far has been made by nonmanufacturers in
particular, but some manufacturers are finally beginning to increase production
capacity in Japan, reflecting the yen's
depreciation the past two years, although automobile firms' shifting of
production facilities to overseas, which has been made in a full-fledged manner
since around 2014, remains in some part.
From
a somewhat longer-term perspective, whether a change in firms' production network
strategies will become widespread, in turn leading to increasingly building up
production capacity in Japan rather than overseas, depends on their medium- to
long-term projections for exchange rates.
Specifically, if firms judge the yen's depreciation the past two years to
be a sustainable trend, they would proceed with increasing their production capacity
in Japan. On the other hand, firms that
have concern regarding a possible resurgent appreciation of the yen would not
easily change their production network strategies even with the recent
depreciation of the yen. In this regard,
the
Annual Survey of Corporate Behavior
,
conducted by the Cabinet Office, provided a favorable factor: the yen-U.S.
dollar rate for the next year forecasted by firms was 119.5 yen/dollar, marking
a weaker yen forecast for the third consecutive year (Chart 10). However, it should be noted that, when firms
decide their fixed investment, long-term projections for the next five to ten
years are important. Therefore, it is
uncertain whether a trend of increasing production capacity in Japan will
become widespread in the future.
D. Developments in Prices
Let
me now turn to developments in prices. The
year-on-year rate of increase in the consumer price index (CPI) for all items
less fresh food has been about 0 percent recently, reflecting the decline in
energy prices. It is likely to be at
this level for the time being, due to the remaining effects of the decline in
energy prices (Chart 11). This suggests
that consumer prices also lack momentum at present. However, a decline in general prices due to
the decrease in energy prices exerts upward pressure on real income, and
therefore I consider this to be a favorable factor for Japan's economy. What matters is not the fluctuations in monthly
figures of the year-on-year rates of change in the CPI, but the underlying
trend in inflation, which reflects the overall economic conditions. In my view, the underlying trend in inflation
is firmly maintained.
In a situation where the inflation rate
rose mainly due to the depreciation of the yen and the increase in energy
prices in the past two years, various soft data suggested a negative reaction by
households to a rise in the inflation rate in light of sluggish growth in real
wages. In fact, private consumption,
which was also affected by the consumption tax hike, had been sluggish (Chart
12). This should prove that people
consider it desirable to see the inflation rate rising in balance with wages
and income as economic conditions improve, rather than seeing the inflation
rate simply rising. I believe that the
price stability target intrinsically aims for such desirable developments.
A
matter of concern is whether the deceleration in the rate of increase in the
CPI or the decline in the CPI on a year-on-year basis, which have been observed
recently, will not affect people's medium- to long-term inflation expectations
in a backward-looking manner. In this
regard, judging from firms' price-setting behavior, consumers' spending
activity, and the recent developments in wage negotiations, people's perception
of inflation has been changing steadily despite the decline in energy
prices. Moreover, a wide range of
estimates -- such as those of expected inflation derived from nominal interest
rates
1
and those of trend inflation using a regime-switching model
2
-- suggest
that medium- to long-term inflation expectations in Japan appear to be rising
since the introduction of QQE from a somewhat longer-term perspective (Chart
13). However, under the deflation that
lasted for over 15 years, medium- to long-term inflation expectations appear to
consistently remain lower than those in the United States. The challenge is to re-anchor these
expectations at around 2 percent, comparable to the level in the United States.
What
I consider important as factors that determine people's medium- to long-term
inflation expectations are not just the past developments in the inflation rate
that I mentioned earlier, but also developments in the overall economy and in
asset prices, as well as forward-looking expectation formation based on, for
example, wage revisions. Taking this
point into account, I hold the optimistic view that it is less likely that
people's medium- to long-term inflation expectations will be negatively
affected by a decline in the inflation rate due to the fall in energy prices.
I would note that the recent results of
academic research on the methods for measuring inflation rates offer valuable
suggestions for the old but also new issue of how to define consumer
prices. For example, the
SRI-Hitotsubashi Unit Value Price Index, which has been developed by Professor
Naohito Abe of Hitotsubashi University, incorporates prices of new goods that
firms frequently introduce into markets in calculating price indexes.
3
According to the research by Professor Abe,
46-47 percent of goods do not exist in the same week of the previous year at
the average retailers, indicating that replacement rates of goods are very high
in reality (Chart 14). The same research
also finds that some new goods are virtually unchanged from the previous ones, suggesting
a possibility that firms replace goods frequently as a means of adjusting
prices in effect. In calculating a
change in prices of goods over a particular period, general consumer price
indexes only cover the goods for which price information is available at the beginning
and the end of the period; on the other hand, the SRI-Hitotsubashi Unit Value
Price Index quantifies the importance of the introduction of new goods that I
have just mentioned. The research
concludes that, mainly due to the effects of such introduction on prices, the
year-on-year rate of increase in the SRI-Hitotsubashi Unit Value Price Index
for supermarkets has recently been at about 1 to 1.5 percent, which shows a
higher rate of inflation than in CPI statistics released by the Ministry of
Internal Affairs and Communications (MIC) and in a price index that only covers
continuing goods (Chart 15). These
research results do not allow simple comparison with the CPI statistics
released by the MIC, in part because the coverage of the SRI-Hitotsubashi Unit
Value Price Index is limited to goods with point-of-sale
(POS) data. However, I take the view
that they provide useful insights to firms' price-setting behavior through the
introduction of new goods and its effects on developments in prices, and to a
divergence between the inflation rate perceived by households and that measured
by price statistics.
See
Kei Imakubo and Jouchi Nakajima, "Estimating Inflation Risk Premia from Nominal and Real Yield Curves Using a Shadow-Rate Model,"
Bank of Japan Working Paper Series
No. 15-E-1, April 2015.
See Sohei Kaihatsu and Jouchi Nakajima, "Has Trend Inflation Shifted? An Empirical Analysis with a Regime-Switching Model,"
Bank of Japan Working Paper Series
No. 15-E-3, May 2015.
For details, see Naohito Abe, "
Saikin no Kakaku Shisuu no Doukou to Shin Shohin no Eikyo ni tsuite
(Recent Developments in Price Indexes and Effects of New Goods)," Newsletter No. 3, the Research Center for Economic and Social Risks (RCESR), Institute of Economic Research, Hitotsubashi University, March 2015 (available in Japanese), and Naohito Abe et al., "Effects of New Goods and Product Turnover on Price Indexes,"
RCESR Discussion Paper Series
No. DP15-2, March 2015.
II.
Future Conduct of Monetary Policy
A. The Price Stability Target and Conduct of
Monetary Policy
In what follows, I explain issues
regarding monetary policy. About two
years ago, the Bank introduced QQE to achieve the price stability target of 2
percent in terms of the year-on-year rate of change in the CPI at the earliest
possible time, with a time horizon of about two years. The latest figure for the year-on-year rate
of increase in the CPI is about 0 percent due to the decline in energy prices,
and the baseline scenario outlined in the April 2015
Outlook for Economic Activity and Prices
shows that the timing of
reaching the price stability target has been delayed to around the first half
of fiscal 2016 (Chart 16). However, the
Bank's Policy Board has judged that no policy actions are necessary at this
point based on the view -- as I mentioned earlier -- that the underlying trend
in inflation is firmly maintained under the virtuous cycle of the economy.
With regard to the timing of reaching
the price stability target, I believe that the phrase "at the earliest
possible time" represents the essence and that "a time horizon of
about two years" is only a non-binding target, as the commitment to
achieving a specific price level within a specific time frame, in my opinion,
does not fit the conduct of monetary policy adopted by other major countries in
the first place. That is, in my
understanding, the price stability target is a rolling target with a time
horizon of about two years, and this is broadly in line with the idea of
inflation targeting adopted by major countries.
From this viewpoint, the delay in the timing of reaching the price
stability target would not be the essential problem. As I touched on earlier, firms and households
generally have a negative reaction to mere inflation, mainly due to concern
over a rise in costs and to the negative effects on real wages, both stemming
from a rise in import prices.
On the other hand, in continuing with
QQE, I consider it necessary to take into account that this policy is a kind of
shock therapy that influences formation of people's inflation expectations
through the lowering of real interest rates and risk premiums brought about by
massive asset purchases, as well as through a strong commitment. The Bank has provided forward guidance --
namely, that it will continue with QQE, as long as it is necessary for
achieving the price stability target in a stable manner -- and of course, the
necessity of continuing QQE will be judged in line with this guidance. I therefore do not think that the current
policy framework should be reviewed in an automatic fashion simply because two
years have passed since the introduction.
In my understanding, the price stability target is a flexible concept
with a certain range for upward and downward deviations of the actual inflation
rate from the target under the framework of forecast targeting. It is also my understanding that achieving
the price stability target in a stable manner does not refer to a state in
which the year-on-year rate of increase in the CPI simply marks 2 percent, but
rather one in which people's medium- to long-term inflation expectations are
re-anchored at around 2 percent -- in other words, a situation in which
households and firms are projected to shift their consumption and investment
behavior to one that assumes around 2 percent inflation.
The status of achieving the price
stability target and the necessity of continuing QQE will be judged by the
Bank's Policy Board at each Monetary Policy Meeting. In doing so, I would like to take into
account (1) the effects of QQE after its expansion, (2) the sustainability of
the Bank's massive JGB purchases, and (3) a wide range of QQE's side effects,
all of which I will elaborate on shortly.
B. Effects of QQE after Its Expansion
The first point
that needs to be examined in continuing with QQE is its policy effects (Chart
17). After the expansion of QQE at
end-October 2014, the 10-year JGB yields temporarily dropped below 0.2 percent,
but these recently have recovered to around the level seen prior to the expansion. Meanwhile, the market's outlook for economic
activity and prices has actually been revised downward, and therefore there is a
lack of persuasive evidence of a further rise in inflation expectations.
One of the assumed
transmission mechanisms of QQE is to put downward pressure on nominal interest
rates across the entire yield curve through massive purchases of JGBs. I understood the expansion of QQE at
end-October 2014 as an action that would strengthen such a mechanism. In reality, however, it appears to me that
the degree of difficulty in implementing QQE is rising, as the effect of
lowering nominal interest rates has been diminishing gradually, due mainly to a
rise in liquidity premiums, despite a large-scale expansion of the Bank's JGB
purchases.
Let me give you
some background as to why it has become difficult for long-term interest rates
to decline. First, interest rate levels
are already low, and it is becoming difficult to see a linear relationship
between the amount of JGB purchases and interest rates. Second, there tends to be less demand for
JGBs from final investors under extremely low interest rates. Third, dealers' risk tolerance is declining,
as there is an increase in volatility due to the decline in market liquidity
and to the effects of overseas interest rates.
I will explain
these three factors in more detail. With
regard to the first one, the key is whether real interest rates will decline
further -- in other words, whether people's medium- to long-term inflation
expectations will rise further only with the Bank's "strong and clear
commitment" -- in a situation where it is becoming difficult for nominal
interest rates to decline. Of course, it
may be theoretically possible to further push down nominal interest rates if
the Bank continues its purchases of JGBs even with negative interest
rates. However, in that case, the Bank
would become the only buyer of JGBs, which would likely give rise to a concern
over the Bank's purchases being perceived as financing the fiscal deficit, as
well as to a further decline in market functioning. Regarding the second factor, whether or not
demand from final investors will decrease depends in part on their future
stance on JGB purchases. For example, a
reduction in life insurance companies' promised return for some insurance
products that will start from July 2015 might affect investors' future behavior
(Chart 18). As for the third factor,
dealers' risk tolerance will likely change depending on market conditions.
Taking such factors
into consideration, I will pay close attention not only to the effects of the
progress in the Bank's asset purchases on interest rate formation, but also to
changes in investors' and dealers' behavior, and closely monitor how policy
effects will emerge in the future.
C. Sustainability of the Bank's Massive Asset
Purchases
The second point
that needs to be examined in continuing with QQE is the sustainability of the
Bank's massive JGB purchases (Chart 19).
The Bank currently commits to purchasing JGBs with medium- to long-term
maturities so that their amount outstanding will increase at an annual pace of
about 80 trillion yen. On a gross basis,
the Bank purchases JGBs at an annual pace of about 110 to 120 trillion yen,
which is equivalent to about 90 percent of the total amount of JGBs' market
issuance. If final investors were to
reduce their holdings of JGBs by redeeming the bonds each time they come to
maturity and not reinvesting the amount redeemed in JGBs, the Bank's massive
JGB purchases would be sustainable.
However, in reality, there is a certain level of demand for JGBs, mainly
for those used as collateral. For
example, the amount of JGB holdings by major banks, which had been reduced at
the time QQE was introduced, has been stable recently, and the same applies to
the amount held by regional financial institutions. In a situation where there appears to be a
certain level of demand by final investors to reinvest the amount redeemed at
maturity, the sustainability of the Bank's JGB purchases may become an issue if
the Bank continues its massive purchases at the current pace while final
investors reduce their holdings of JGBs to the least possible extent. This limit is dependent on the interest rate
level and other factors at each point in time, and thus is difficult to project
at this point. Nevertheless, in
continuing with QQE, it is important to give consideration to its feasibility
in terms of the Bank's market operations.
D. Examination of Side Effects
The third point
that needs to be examined in continuing with QQE is the side effects of the
Bank's massive asset purchases. It is
true that policy effects and side effects are two sides of the same coin, and
positive effects cannot be expected from policies that have no side effects. Having said that, in continuing with the
unprecedented policy, it is essential to compare its positive effects and side
effects and examine whether the latter do not outweigh the marginal effects
from continuing the policy. With regard
to how the increase in the share of the Bank's holdings in the JGB market
affects market functioning, I am somewhat concerned about the results of the
Bond Market Survey conducted by the Bank in February 2015, as recovery in
market functioning is considered to be the key to a smooth exit from QQE from a
somewhat longer-term perspective (Chart 20).
I also continue to pay careful attention to the effects of the continued
extremely low interest rates on financial institutions' business, and to the
stability of the broadly defined settlement system.
E. Importance of Efforts toward Fiscal
Consolidation
The Bank's massive purchases of JGBs are
carried out only in the context of the conduct of monetary policy and not in
any way to finance the fiscal deficit.
In order for this explanation to be persuasive, the government's efforts
toward fiscal consolidation are important.
It also should be noted that the massive JGB purchases, if continued
over a long period, could lead to extremely low interest rates being built into
the fiscal plan, thereby affecting fiscal discipline -- although the
continuation of such purchases aims at fulfilling the purpose of monetary
policy. Once market participants have
concern about fiscal discipline, controlling long-term interest rates will
become difficult, even for the Bank. My
assessment is that QQE has generally been exerting its intended effects so far,
but in order for QQE to gain success -- such as a smooth process of finding an
exit from QQE from a somewhat longer-term perspective -- the government's
initiatives toward fiscal consolidation are important. The government looks to formulate a new
fiscal consolidation plan by summer 2015 to maintain its goal of generating a
surplus in the primary balance for fiscal 2020.
The Bank strongly expects that the government will steadily promote
measures aimed at establishing a sustainable fiscal structure with a view to
ensuring the credibility of the country's fiscal management.
Concluding Remarks: Economic
Activity in Yamanashi Prefecture
My concluding remarks will touch on the
economy of Yamanashi Prefecture.
A feature of the industrial structure of
Yamanashi Prefecture is that its share of manufacturing -- industries relating
to machinery in particular -- is larger than that in the country overall. The prefecture's economy has recently been
recovering moderately, led by manufacturing firms that are attracting external
demand, both directly and indirectly (Chart 21).
Nevertheless,
from a somewhat longer-term perspective, there have been moves by manufacturing
industries in the prefecture to concentrate their production sites in Japan or
shift a part of their production overseas, for the purpose of enhancing cost
competitiveness, mainly in response to the yen's appreciation since the Lehman
shock and to intensification of competition stemming from growth of Asian
firms. Such moves have led to structural
issues in the prefecture, such as a declining population as well as an aging
population and declining birth rate.
In addressing these issues, the key
should be to make full use of the advantages of Yamanashi Prefecture. The first advantage is that the prefecture is
close to Tokyo and yet blessed with a bounteous nature, including Mt. Fuji and
hot springs. Recently, in particular, the
number of foreign visitors to the prefecture has been increasing substantially,
partly owing to the yen's depreciation.
It also should be noted that the prefecture is a highly attractive place
to move to, for those who live in the Tokyo metropolitan area. I have heard that initiatives to take
advantage of such an environment are spreading, such as improving tourism
infrastructure and expanding a supporting system to invite those who wish to
move to the area. Moreover, events such
as the Tokyo 2020 Summer Olympic and Paralympic Games and the launch of the
Linear Chuo Shinkansen line will act as a tailwind for Yamanashi Prefecture.
The second advantage is the advanced
technologies that firms in Yamanashi Prefecture have developed so far. I hope that technological innovation will
advance as a result of further brushing up these technologies, applying them to
new areas, and working to integrate them with other firms' technologies. This, together with cooperative efforts among
industry, government, academia, and financial institutions, is expected to lead
to future achievements.
I would like to conclude this speech by
expressing my strong hope that the region will enjoy further growth in the
future through the initiatives I have mentioned, while making use of its
potential.