Seiji Adachi: Economic activity, prices, and monetary policy in Japan

Speech by Mr Seiji Adachi, Member of the Policy Board of the Bank of Japan, at a meeting with local leaders, Ehime, 29 November 2023.

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

I. Economic Activity and Prices

A. Economic Activity

I would like to start my speech by talking about points that are noteworthy in examining the current situation and outlook for Japan's economy.

Amid the ongoing reopening of the economy and society, as seen in, for example, the downgrading of COVID-19 to a Class V infectious disease under the Infectious Disease Control Law in May 2023, Japan's economy has recovered moderately (Chart 1). With such progress in reopening, demand that was suppressed during the pandemic, or pent-up demand, will likely continue to be a factor pushing up economic activity. However, as a significant rise in such demand is expected to peak out in the near future, it seems that the actual strength of Japan's economy has begun to be tested.

Let us look at recent developments in Japan's economic activity in detail. With respect to private consumption, the positive effects from pent-up demand have remained in consumption of some durable goods such as automobiles. I have an impression that consumption overall has regained the pre-pandemic trend of a stable increase, albeit at a moderate pace (left panel of Chart 2). That said, due in part to a decline in real disposable income stemming from recent price rises, households have been defensive about spending; for instance, their demand for frequently purchased items including beverages, food, and daily necessities has shifted to lower-priced goods such as affordable private brand products. Meanwhile, services consumption such as entertainment, travel, and accommodations has remained firm despite having been affected by price hikes (right panel of Chart 2). These developments suggest that households, faced with high inflation, have increasingly been selective with their spending patterns, in that they are willing to spend money for certain goods and services regardless of price while opting for lower prices on other goods and services or refraining from spending in the first place. These changes in spending patterns will potentially affect price developments, which I will describe later.