Goushi Kataoka: Economic activity, prices, and monetary policy in Japan

Speech by Mr Goushi Kataoka, Member of the Policy Board of the Bank of Japan, at a meeting with business leaders, Okayama, 1 March 2018.

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

I. Developments in economic activity and prices

A. Recent developments and outlook for economic activity at home and abroad

I would like to start my speech by looking at developments in the global economy affecting Japan's economy. Since the autumn of 2017, improvement in economic sentiment has been noticeable worldwide (Chart 1). The global Purchasing Managers' Index (PMI) has shown remarkable improvement for manufacturing activity in particular, and business fixed investment and trade volume have been increasing. One of the factors underlying this improvement in economic sentiment is that, while advanced economies remain robust, there is a cyclical factor of continued moderate recovery in production for the resource and manufacturing sectors, which bottomed out in 2016 amid the waning of concern over a slowdown in emerging economies, especially China. The cultivation of the potential demand by utilizing new technologies - such as the Internet of Things (IoT), artificial intelligence (AI), and autonomous driving - also contributes to the improvement to some extent (Chart 2).

Looking at the global economy from the two perspectives of the real GDP growth rate and the inflation rate, developments can be described as follows. Until 2016, the economy remained in a phase where sluggish growth coexisted with low inflation. In 2017, it moved into a phase where an improving trend in the growth rate became evident while the inflation rate remained low. Looking ahead, the global economy is likely to shift to a phase where inflation is clearly accelerated by continued relatively high growth if various downside risks that have been pointed out, such as the following, do not materialize: (1) the risk of monetary policy normalization in the United States and Europe exerting downward pressure on the global economy; (2) the risk of deceleration in the Chinese economy; and (3) geopolitical risks surrounding North Korea and the Middle East. One of the key points for the time being is whether the global economy will reach the phase of rising inflation with high growth that I just mentioned, while avoiding a situation of economies stalling, with major economies beginning to see changes in their monetary policy stances, and if such a phase is achieved, when that will happen.