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, 12 October 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.

Currently, Japan's economy seems to be approaching a significant turning point with the reopening of the economy from the COVID-19 pandemic, in that moves to realize a virtuous cycle between prices and wages, which has been a longstanding challenge for the economy, have gradually been observed. The economy has been trapped in sluggish growth in prices and wages since the bursting of the bubble economy in the 1990s. Nevertheless, the high inflation observed overseas since spring 2021 has started to affect Japan, and accordingly, the year-on-year rate of increase in Japan's consumer price index (CPI) for all items less fresh food has continued to exceed 2 percent since spring 2022. In this situation, wage growth has become the highest in 30 years, following the 2023 annual spring labor-management wage negotiations. The major focal point at this time is whether the momentum of such wage growth will be sustained.

Turning to overseas economies, many countries and regions have continued to see moderate economic slowdown, as the high inflation caused by the post-pandemic normalization of economic activity has finally begun to be subdued. Specifically, in the United States and Europe, inflation rates reached around 8 to 10 percent in 2022 (Chart 1). Central banks in these economies have rapidly raised their policy interest rates in order to contain high inflation (Chart 2). Until very recently, interest rates and foreign exchange rates in the markets had sometimes been highly volatile because there remained considerable uncertainty as to what extent central banks would continue monetary tightening to contain persistently high inflation (Chart 3). That said, as far as the economic situation across countries and regions shows, I believe that the path toward bringing down inflation to the target level has started to come into sight at last. If high inflation can be subdued without the need for central banks to conduct additional policy interest rate hikes by a large margin, the risk of a hard landing, which had been a matter of concern, will likely decrease, despite the moderate economic slowdown continuing for some time (Chart 4).