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

Speech by Mr Toyoaki Nakamura, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Hyogo, 30 November 2023.

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

I. Economic and Price Developments at Home and Abroad

I will begin my speech by talking about recent developments in and the outlook for overseas economies.

Uncertainties surrounding these economies have been heightening, with inflationary pressure remaining on a global basis, coupled with the effects of successive policy interest rate hikes by central banks, the situation in Ukraine, and rising concerns over growing tensions in the Middle East (Chart 1). The U.S. economy has been firm, with the employment and income situation remaining resilient, and is increasingly expected to make a soft landing. However, achieving the 2 percent inflation target likely will take time, due mainly to an ongoing expansion in fiscal spending and to a continuously high wage growth rate. Furthermore, there is a possibility that people have front-loaded their consumption, mainly of goods, since wage growth has exceeded 4 percent for more than two years and high inflation has become prolonged. Due to this possibility and the downward pressure on private consumption and business performance, some have voiced concerns over a potential economic slowdown, and my view is that this could even lead to stagflation. Specifically, this pressure is exerted by the effects of successive policy interest rate hikes, a decline in excess savings, and a resumption of student loan repayments. In Europe, an inflation gap has remained across countries. In this situation, European economies have stayed on a slowing trend, mainly reflecting heightened geopolitical risks and the effects of successive policy interest rate hikes. The slowing trend was also demonstrated in the euro area's real GDP for the July-September quarter of 2023, which decreased by 0.1 percent from the previous quarter. Given these developments, there are concerns that European economies may fall into recession. The Chinese economy is projected to continue picking up, partly with policy support. Nonetheless, its potential growth rate is expected to keep decreasing because growth expectations will likely decline and households and private firms will likely have a higher preference to suppress their spending. The background to this, in addition to a population decline and a protracted high youth unemployment rate, is that the Chinese economy does not yet have growth drivers that have become strong enough to replace the drivers that have led the high economic growth to date, including real estate investment, foreign firms' investment and technology transfer, and exports. In addition, further growth of the Indian economy is anticipated, mainly led by an expansion of domestic demand due to a population increase and by foreign firms' more 2 aggressive direct investment, as the country seeks to stimulate its manufacturing sector through the Make in India initiative.