Toyoaki Nakamura: Economic activity, prices and monetary policy in Japan

Speech (via webcast) by Mr Toyoaki Nakamura, Member of the Policy Board of the Bank of Japan, at a meeting with business leaders, Kochi, 10 February 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

I. Recent Economic and Price Developments

A. Economic Developments

I will begin my speech by talking about overseas economies.

The growth rates for the April-June quarter of 2020 were substantially negative in many countries due to measures such as lockdowns implemented in response to the spread of the novel coronavirus (COVID-19). However, those for the July-September quarter turned significantly positive amid a resumption of economic activity (Chart 1). The pace of economic improvement for the October-December quarter varied across regions and sectors; the growth rates of the United States and China were positive for two consecutive quarters while that of the European Union turned negative due to the tightening of public health measures following a resurgence of COVID-19. As for the outlook, overseas economies are likely to improve, partly supported by aggressive macroeconomic policies, although the pace is likely to be moderate for the time being. Downside risks are high because developments in each country are likely to remain dependent on the course of COVID-19.

Japan's economy has picked up as a trend, although it has remained in a severe situation (Chart 2). Exports and production have continued to increase clearly, mainly for automobile-related goods, and also for a wide range of goods, including capital goods and IT-related goods. However, stagnation has become more noticeable again in the nonmanufacturing industry, particularly for face-to-face services, mainly due to a third wave of COVID-19. Business fixed investment continued to decline until the July-September quarter of 2020. Nevertheless, machinery investment by the manufacturing industry has been picking up, reflecting the recovery in exports and production. According to the Bank of Japan's December Tankan (Short-Term Economic Survey of Enterprises in Japan), however, the proportion of firms responding that current business conditions are "unfavorable" continued to exceed the proportion of those responding that they are "favorable." The same result was observed for future business conditions. Sales forecasts for all industries and enterprises for fiscal 2020 declined by almost 10 percent on a year-on-year basis. It is a matter of concern that the year-on-year rate of growth in research and development (R&D) investment plans for all industries and enterprises for fiscal 2020 was negative. Given that the impact of COVID-19 has been expanding after the release of the Tankan, downside risks to business fixed investment have been significant, mainly in the face-to-face services industry.