Bank of Japan : Outlook for Economic Activity and Prices (January 2016, full text)

Outlook for Economic Activity and Prices (January 2016)

Not to be released until 2:00 p.m. Japan Standard Time on Saturday, January 30, 2016.‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌‌

January 30, 2016 Bank of Japan

Outlook for Economic Activity and Prices‌

January 2016

(English translation prepared by the Bank's staff based on the Japanese original)

Please contact the Bank of Japan at the address below in advance to request permission when reproducing or copying the content of this document for commercial purposes.

Secretariat of the Policy Board, Bank of Japan

P.O. Box 30, Nihonbashi, Tokyo 103-8660, Japan

Please credit the source when quoting, reproducing, or copying the content of this document.

The Bank's View1‌

Summary

• Japan's economy has continued to recover moderately, although exports and production have been affected by the slowdown in emerging economies. Through fiscal 2017, domestic demand is likely to follow an uptrend, with a virtuous cycle from income to spending being maintained in both the household and corporate sectors, and exports are expected to increase moderately on the back of emerging economies moving out of their deceleration phase. Thus, Japan's economy is likely to be on a moderate expanding trend.

• The year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is likely to be about 0 percent for the time being, due to the effects of the decline in energy prices, and, as the underlying trend in inflation steadily rises, accelerate toward 2 percent. Meanwhile, assuming that crude oil prices will rise moderately from the recent level, it is likely that the contribution of energy items to the year-on-year rate of change in the CPI will decrease gradually from the current level of slightly more than minus 1 percentage point, but remain negative until the end of fiscal 2016.2 Based on this assumption, the timing of the year-on-year rate of change in the CPI reaching around 2 percent -- the price stability target

  -- is projected to be around the first half of fiscal 2017.3,4 Thereafter, the year-on-year rate

  of change in the CPI is likely to be around 2 percent on average.

  
  

• Comparing the current projections with the previous ones, the projected growth rates are more or less unchanged. The projected rate of increase in the CPI for fiscal 2016 is lower, and the projection for fiscal 2017 is more or less unchanged. The downward revision of the projection for the CPI and the delay in the projected timing of the CPI reaching around 2 percent are due to the assumption of lower crude oil prices.

• As for the conduct of monetary policy, the Bank introduced "Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate" in order to achieve the price stability target of 2 percent at the earliest possible time. It will continue with "QQE with a Negative Interest Rate," aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine risks to economic activity and prices, and take additional easing measures in terms of three dimensions -- quantity, quality, and interest rate -- if it is judged necessary for achieving the price stability target.

1 The text of "The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on January 28 and 29, 2016.

2 Individual Policy Board members make their forecasts assuming that Dubai crude oil prices will rise

moderately from the recent 35 U.S. dollars per barrel to the range of 45-50 dollars per barrel toward the end of the projection period. Under this assumption, the contribution of energy items to the year-on-year rate of change in the CPI (all items less fresh food) is estimated to be around minus 0.9 percentage point for fiscal 2015, and approximately in the range of minus 0.7 to minus 0.8 percentage point for fiscal 2016. More specifically, the contribution is expected to start to lessen in the second half of fiscal 2016 and reach around 0 percentage point during the first half of fiscal 2017.

3 The Bank has set the price stability target at 2 percent in terms of the year-on-year rate of change in

the all-item CPI. Projections are made on the all-item CPI excluding fresh food, for which prices tend to be largely affected by unpredictable factors such as weather.

4 The projection of the year-on-year rate of change in the CPI for fiscal 2017 excludes the direct effects

of the consumption tax hike. The January 2016 Outlook for Economic Activity and Prices (Outlook Report) assumes that the consumption tax will rise to 10 percent in April 2017 and that a reduced tax rate will be applied to food and beverages -- excluding alcohol and dining-out -- and newspapers.

1

1. The Current Situation of Economic Activity and Prices in Japan

   
   

   Japan's economy has continued to recover moderately, although exports and production have been affected by the slowdown in emerging economies. Overseas economies -- mainly advanced economies -- have continued to grow at a moderate pace, despite the slowdown in emerging economies. In this situation, exports have been picking up, although sluggishness remains in some areas. On the domestic demand side, business fixed investment has been on a moderate increasing trend as corporate profits have continued to improve markedly. Against the background of steady improvement in the employment and income situation, private consumption has been resilient and housing investment has been picking up. Public investment has been on a moderate declining trend, although it remains at a high level. Industrial production has continued to be more or less flat. Financial conditions are accommodative. On the price front, the year-on-year rate of change in the CPI (all items less fresh food, and the same hereafter) is about 0 percent. Inflation expectations appear to be rising on the whole from a somewhat longer-term perspective, although some indicators have recently shown relatively weak developments.

   
   

2. Baseline Scenario of the Outlook for Economic Activity and Prices in Japan

A. Outlook for Economic Activity

Looking ahead, Japan's economy is likely to be on a moderate expanding trend because domestic demand is likely to follow an uptrend, with a virtuous cycle from income to spending being maintained in both the household and corporate sectors, and because exports are expected to increase moderately on the back of emerging economies moving out of their deceleration phase.

Specifically, the economy is expected to continue growing at a pace above its potential through fiscal 2016.5 Thereafter, through fiscal 2017, it is projected to maintain its positive growth, although with a slowing in its pace to around a level somewhat below the

5 Japan's potential growth rate is estimated to be around 0.5 percent or lower recently under a specific methodology, and is expected to rise gradually toward the end of the projection period. However, the estimate of the potential growth rate varies depending on the methodologies employed and could be revised as the sample period becomes longer over time. Thus, it should be regarded as being subject to a considerable margin of error.

2