Asahi Noguchi: Economic activity, prices, and monetary policy in Japan

Speech by Mr Asahi Noguchi Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Okinawa, 22 June 2023.

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

A. Economic Developments at Home and Abroad

I will begin my speech by talking about recent economic developments at home and abroad.

The global macroeconomic landscape has changed significantly with the COVID-19 pandemic that began in 2020 marking a divide: the global economy is now experiencing a high-inflation, high-interest rate environment more or less for the first time since the 1970s, having transformed from a low-inflation, low-interest rate environment known as secular stagnation. In the United States and Europe, rapid inflation began around spring 2021, when these economies began to emerge from the pandemic driven by widespread vaccination, and by 2022, inflation rates had reached around 8 to 10 percent. In this situation, central banks in these economies have rapidly raised their policy interest rates in order to contain high inflation (Chart 2). As I will touch on later, a tightening of labor market conditions that had taken place as economies began to emerge from the pandemic can be pointed to as background to the rapid inflation. However, labor market conditions have remained tight in these economies amid a moderate economic slowdown due to the policy interest rate hikes, and nominal wages have continued to rise at a pace above the historical trend. Given this situation, the monetary tightening phase is expected to continue, and the global economy is likely to continue decelerating for the time being.

I will now turn to developments in Japan's economy. The economy has continued to pick up as consumption, particularly in the face-to-face services industry, has been increasing moderately with the impact of COVID-19 waning, although exports and industrial production have been more or less flat amid the continued slowdown in overseas economies. As for the outlook, although such slowdown is likely to continue for some time, I expect Japan's economy to recover moderately on the back of the following factors: (1) further expansion in inbound tourism demand against the background of the yen's depreciation; (2) full-fledged normalization of the face-to-face services industry with the downgrading of COVID-19 to a Class V infectious disease; (3) easing of supply-side constraints that had remained in some areas, such as semiconductors; as well as (4) an expected expansion in business fixed investment due to Japanese manufacturers transferring their production sites back home and to labor-saving investment to address labor shortages.