T d S G hToward Stronger Growth:Challenges facing Japan's Economyg g p y

Speech at a Meeting Held by the Yomiuri International Economic Society in Tokyo

September 6, 2012

Masaaki Shiraka aMasaaki ShirakawaGovernor of the Bank of Japan

ContentsIntroduction1. Recent Developments in Japan's Economy2 Mechanism for Economic Recovery in Japan before the Lehman Shock2. Mechanism for Economic Recovery in Japan before the Lehman Shock3. Overseas Economies

- Current Situation and Outlook for the Overseas EconomiesEffect of the Bursting of the Credit Bubble on the Overseas Economies- Effect of the Bursting of the Credit Bubble on the Overseas Economies

- European Debt Problem and Its Challenges4. Growth Potential

J ' G th P t ti l- Japan's Growth Potential- Measures to Raise Japan's Growth Potential

5. Deflation6 S Y6. Stronger Yen

- Recent Developments in Foreign Exchange Rate and Its Background- Effects of Foreign Exchange Rate Movements and Responses

7. Fiscal Sustainability8. The Bank's Conduct of Monetary Policy

- Pursuing Powerful Monetary Easing

1

- Accommodative Financial Conditions and Measures to Take Advantage of These ConditionsConcluding Remarks

World GDP

Chart 1

World GDP

135real, CY 2007=100

125

130World

Advanced economies

115

120 Emerging economies

105

110

100

105

90

95

0 7 0 8 0 9 1 0 1 1 12CY

2

Source: IMF.

0 7 0 8 0 9 1 0 1 1 12CY

Real GDP in the United States and Euro Area: Comparison with Japan

Chart 2

Real GDP in the United States and Euro Area: Comparison with Japan

United States Euro Area

120

130

120

130

110 110

100 100

80

90

United States (CY 2006=100)

Japan (CY 1990 100) 80

90

Euro area (CY 2006=100)

70

80

00 02 04 06 08 10 12

Japan (CY 1990=100)

US

70

80

00 02 04 06 08 10 12

Japan (CY 1990=100)

EU:

3Sources: BEA; Eurostat; Cabinet Office.

00 02 04 06 08 10 12JP :

US :84 86 88 90 92 94 96 98 00 02 04 06 08 10

00 02 04 06 08 10 12JP :EU:

84 86 88 90 92 94 96 98 00 02 04 06 08 10

Japan's GDP Growth Rate and Business Conditions

Chart 3

Japan s GDP Growth Rate and Business Conditions

60

7010y/y % chg. D.I., % points

Forecast

"Fa

30

40

50

60

6

8 Real GDPBusiness conditions/manufacturing (right scale)Business conditions/nonmanufacturing (right scale)

Forecast avorable"

10

20

30

2

4

-20

-10

0

4

-2

0

"

-50

-40

-30

8

-6

-4

"Unfavora

-70

-60

-10

-8

90 92 94 96 98 00 02 04 06 08 10 12

able"

CY

4

Notes: 1. Shaded areas indicate periods of recession (according to the Cabinet Office).2. Figures for business conditions are based on the Tankan, aggregates of all business sizes.

Sources: Cabinet Office; Bank of Japan.

Real GDP Growth Rate of the Global Economy

Chart 4

Real GDP Growth Rate of the Global Economy

6y/y % chg.

Average for CY 2000-2007: Average for CY 2004-2007:

5

g+ 4.2% + 5.0%

3

4

2

Average for CY 1990-1999:

1

Average for CY 1990 1999: + 3.0%

-1

0

5Note: Figures are calculated using GDP based on purchasing power parity (PPP) shares of the world total from the IMF. Source: IMF.

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11CY

Effective Exchange Rates of the Yen

Chart 5

50

60Real

CY 2000=100, reversed

70

80

Nominal(Real)Average for

CY 1994-2012

80

90

100

110

Depreciation

(Nominal)Average for

120 Appreciation

ve ge oCY 1994-2012

Notes: 1. The nominal effective exchange rate is an indicator that measures the overall value of individual currencies. It is derived by calculating the weighted average of each currency's exchange rate against other currencies using the annual value of each country's trade with its counterparties as its weights.

130

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12CY

6

2. The real effective exchange rate is an indicator of a country's overall international competitiveness, calculated as follows. First, each of the exchange rates of the country's currency against other currencies (i.e., nominal exchange rates) is deflated by the price indices of those countries to calculate the real exchange rate. Then, the weighted average of the real exchange rates is calculated using the annual value of the country's trade with its counterparties as its weights.

Source: BIS.

Exchange Rate and Real Exports

Chart 6

Real ExportsTransport Equipment,

Capital Goods and Parts

70180CY 2003=100 CY 2003=100, reversed

70180CY 2003=100 CY 2003=100, reversed

7

80

90140

160Increase

Decrease

70

80

90140

160

80

100

110

12080

100

120

Real export

Real effective exchange rate (right scale)

Depreciation

Appreciation

100

110

12080

100

120Transport equipment, capital goods and partsReal effective exchange rate (right scale)

IT-Related Goods Consumer Goods

1208003 04 05 06 07 08 09 10 11 12CY

1208003 04 05 06 07 08 09 10 11 12CY

CY 2003=100 CY 2003=100 reversed CY 2003=100 CY 2003=100 reversed70

80

90140

160

180CY 2003=100 CY 2003=100, reversed

70

80

90140

160

180CY 2003=100 CY 2003=100, reversed

90

100

110100

120

140

IT-related goods

R l ff i h ( i h l )

90

100

110100

120

140

Consumer goods

7Sources: BIS; Ministry of Finance; Bank of Japan.

1208003 04 05 06 07 08 09 10 11 12

Real effective exchange rate (right scale)

CY12080

03 04 05 06 07 08 09 10 11 12

Real effective exchange rate (right scale)

CY

GDP of Advanced Economies

Chart 7

GDP of Advanced Economies

Real GDP Real GDP per Capita Real GDP per Working-Age Person

104JapanUnited StatesE

CY 2007=100

103

104JapanUnited States

CY 2007=100

100

101CY 2007=100

100

102 Euro areaUnited Kingdom

100

101

102 Euro areaUnited Kingdom

98

99

98

97

98

99

96

97

94

96

94

95

96

93

94

95

JapanUnited States

9207 08 09 10 11 12CY

92

93

07 08 09 10 11 12CY

92

93

07 08 09 10 11 12

Euro areaUnited Kingdom

CY

8

Notes: 1. A working-age person refers to those between 15 and 64 years old.2. Figures for 2012 are January-June averages. Figures for the population for 2012 are calculated using the growth rate for 2011.

Sources: World Bank; BEA; Eurostat; ONS; Cabinet Office.

GDP of Japan and China

Chart 8

GDP of Japan and China

Real GDP Growth Nominal GDP per Capita Nominal Gross Fixed Investment over Nominal GDP

40

45 thous. U.S. dollars

45

50%

18

20

China Japan

% chg.

30

35 China Japan

35

40

45

12

14

16p

Average Growth inCY 1990-2011

(China): +10.1%

15

20

25

30

35

6

8

10

5

10

20

25

China Japan

0

2

4 Average Growthin CY 1956-1970(Japan): +9.7%

1955 65 75 85 950

1990 00 1000JP :

CN: CY1955 65 75 85 95

15

1990 00 1000JP :

CN: CY1955 65 75 85 95

-2

1990 00 1000CY

JP :CN:

9

Sources: Cabinet Office; National Bureau of Statistics of China.

Demographic Changes in Japan and China

Chart 9

Demographic Changes in Japan and China

Growth of Working-Age Population

Share of Working-Age Population

Share of Population over 65p p

3

4

Japan

China

y/y % chg.80

Japan

%

35

40

Japan

%

2

3 China

Forecasts by United Nations

70

75 China

25

30

35China

1 65

15

20

25

-1

0

55

60

10

15

-2

1

195565 75 85 95 05 15 25 35 4550

55

195565 75 85 95 05 15 25 35 450

5

195565 75 85 95 05 15 25 35 45CY

10Source: United Nations.

CY CY CY

Population Influx into Metropolitan Areas and Working-Age Population

Chart 10

Population Influx into Metropolitan Areas and Working-Age Population

Japan Chinamil. persons annual avg., % changes from previous period, % points annual avg., %

2.5

3.0

300

400

Influx into metropolitan areas

Working-age population (right scale)4

5

4

5g p p , p annual avg., %

1.5

2.0

200

300

3

4

3

4

0.5

1.0

100 22

-0 5

0.0 0 11

-1.0

-0.5

-100

1

0

1

0Urbanization rate

Working-age population (right scale)

11Sources: World Bank; United Nations; National Institute of Population and Social Security Research.

-1.5 -200

1955 60 65 70 75 80 85 90 95 2000 05 10CY

-1-1

1965 70 75 80 85 90 95 2000 05 10 15 20CY

Share of Countries in World GDP

Chart 11

Share of Countries in World GDPCY2000 CY2011

UnitedLatin

America OthersStates22%

Others 23%

United States31%

India1%

America6% 14%

Euro area

Latin America

8%

NIEs/ASEAN4

5%U.K. 22%

JapanChina10%NIEs/

India2%Euro area

U.K.

Japan15%

China 4%

p8%

10% NIEs/ASEAN4

5%

24%

12

Notes : 1. Converted by market nominal exchange rates.2. Euro area is based on EU17.3. The NIEs consist of South Korea, Taiwan, Hong Kong, and Singapore. ASEAN4 refers to Thailand, Indonesia, Malaysia, and the Philippines.4. Latin America refers to Brazil, Mexico, Argentina, Colombia, Chile, Peru, and Venezuela.

Source: IMF.

Developments in Japan's Real GDP

Chart 12

Developments in Japan s Real GDP

14 y/y % chg.

9.7%

10

12 1956-1970

4

6

8 5.2%1970s

0

2

4

4.4%1980s

-4

-2

0 1.5%1990s

0.6%2000s

-8

-6

13Source: Cabinet Office.

56 60 64 68 72 76 80 84 88 92 96 00 04 0819

Decomposition of Real GDP Growth in Japan

Chart 13

Decomposition of Real GDP Growth in Japan

6

Productivity growth (the rate of growth in real GDP per worker)

avg., y/y % chg.

4

5 Productivity growth (the rate of growth in real GDP per worker)

Rate of change in the number of workers

Real GDP growth rate

2

3

+0.9%

+0.8% 1

2 Forecast

+0.5% -0.3%

-0.6% -0.8%-1

0

-1.2%-2

1970s 1980s 1990s 2000s 2010s 2020s 2030s

14

Note: The rates of change in the number of workers from fiscal 2011 onward are calculated using the projected future population(medium variant) and the projected labor force participation rates (assuming that the labor force participation rates in each age/sexgroup remain the same as those in 2010).

Sources: Cabinet Office; Ministry of Internal Affairs and Communications; National Institute of Population and Social Security Research.

Comments on Prices in the Opinion Survey on the General Public's Views and Behavior

Chart 14

Public s Views and BehaviorComments on the Price Rise

［Rather unfavorable］［Rather favorable］［Neither favorable nor unfavorable］

1.2

13 1

13.2

84.1

85.3

Mar 2012

Dec. 2011

2.1

2.0

12.4

13.1

84.6

84.1

June 2012

Mar. 2012

Comments on the Price Decline0% 20% 40% 60% 80% 100%

［Rather favorable］ ［Rather unfavorable］［Neither favorable nor

unfavorable］

28 8

35.3

39 9

36.7

29 9

27.3

Mar 2012

Dec. 2011

［Rather favorable］ unfavorable］

32.4

28.8

35.5

39.9

30.5

29.9

June 2012

Mar. 2012

Note: The Bank conducts its quarterly Opinion Survey on the General Public's Views and Behavior in order to grasp how the public's current impression of household circumstances and changes in financial and economic conditions affect their perceptions and actions.

Source: Bank of Japan. 15

0% 20% 40% 60% 80% 100%

Nominal Effective Exchange Rates

Chart 15

Nominal Effective Exchange Rates

60CY 2000=100, reversed

70

80

90

100

110

120Depreciation

130

140

Yen

U.S. dollar

Euro

Depreciation

150

160

00 01 02 03 04 05 06 07 08 09 10 11 12

Swiss franc

Korean won

CY

Appreciation

16

Note: The nominal effective exchange rate is an indicator that measures the overall value of individual currencies. It is derived by calculating the weighted average of each currency's exchange rate against other currencies using the annual value of each country's trade with its counterparties as its weights.

Source: BIS.

00 01 02 03 04 05 06 07 08 09 10 11 12CY

Foreign Exchange Transactions and Trade Volume

Chart 16

Foreign Exchange Transactions and Trade Volume

33.2

Yen's foreign exchange

market turnoverturnover

0 6Trade value of

0.6Japan

0 5 10 15 20 25 30 35 40tril. Yen

17

Notes: 1. Figures are as of fiscal 2010. The foreign exchange market turnover is the transaction value of the yen. The trade value is that of Japan'sexports and imports based on its nominal GDP.

2. Daily averages. The trade value is calculated by dividing the total value for 2010 by the number of business days (20 business days times 12 months).

Sources: BIS; Cabinet Office; Bloomberg.

Chart 17

Exchange Rates and Exports of Switzerland and JapanExchange Rates and Exports of Switzerland and Japan

Nominal Effective Exchange Rate Value of Exports

70

80

CY 2000=100, reversed

300

350

Japan

CY 2000=100

90

100 250

300 p

Switzerland

110

120

130 150

200

130

140

150

Yen

Swiss franc

Depreciation

100

150

160

170

Appreciation

0

50

18

Note: Value of exports is calculated on a U.S. dollar basis.Sources: Cabinet Office; Eurostat; Bloomberg; BIS.

00 01 02 03 04 05 06 07 08 09 10 11 12CY 00 01 02 03 04 05 06 07 08 09 10 11 12CY

International Competitiveness Coefficient

Chart 18

International Competitiveness Coefficient

0.8

1.0

0 4

0.6

0.8

0 0

0.2

0.4

-0.2

0.0

T t i t

-0.6

-0.4 Transport equipmentGeneral industrial machinerySemiconductor devices, etc.Television receivers

-1.0

-0.8

92 94 96 98 00 02 04 06 08 10

Television receiversHousehold-type electrical equipment

CY

19

Note: International Competitiveness Coefficient (ICC) equals net export value divided by the sum of export value and import value. The closer the value of ICC is to one, the greater the competitiveness.

Source: United Nations.

92 94 96 98 00 02 04 06 08 10CY

JGB Yields and Interest Payments on JGBs

Chart 19

JGB Yields and Interest Payments on JGBs

JGB Yields Interest Payments on JGBs

6 5% tril yen tril yen

5.5

6.0

6.5 Weighted average yield of previously issued JGBs

Newly-issued yields of 10-year JGBs

Newly-issued yields of 2-year JGBs 700

80010

Total amount of JGBs

tril. yen tril. yen

4.0

4.5

5.0

600

8

9Yearly payments on JGBs

2 5

3.0

3.5 500

7

8

1.5

2.0

2.5

400

6

7

0.0

0.5

1.0

200

300

5

20Source: Ministry of Finance.

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11FY 00 01 02 03 04 05 06 07 08 09 10 11FY

Japan's Fiscal Revenue/Expenditure, Inflation, and Real GDP Growth

Chart 20

p p , ,< GDP Deflator and Revenue > < GDP Deflator and Expenditure >

4GDP deflator, y/y % chg.

4GDP deflator, y/y % chg.

0

2

0

2

-4

-2

15 10 5 0 5 10 15

-4

-2

10 5 0 5 10

< Real GDP Growth Rate and Revenue > < Real GDP Growth Rate and Expenditure >

6real GDP growth rate, y/y % chg.

-15 -10 -5 0 5 10 15revenue, y/y % chg.

-10 -5 0 5 10expenditure, y/y % chg.

6real GDP growth rate, y/y % chg.

0

2

4

0

2

4

-6

-4

-2

10 5 0 5 10

-6

-4

-2

15 10 5 0 5 10 15

Note: The sample period is since fiscal 1991. Figures for revenues and expenditures are those of central and local governments, which include the payment/receivable of interest.

Source: Cabinet Office. 21

-10 -5 0 5 10expenditure, y/y % chg.

-15 -10 -5 0 5 10 15revenue, y/y % chg.

Asset Purchase Program

Chart 21

Breakdown of the Asset Purchase ProgramMaximum Amount and Actual Amount of Increase

in the Size of the Asset Purchase Program

t il tril. yen

Cumulative

70

80tril. yen

Feb 2012

Jul.2012Removed the minimum bidding yield for outright

purchasesof T-Bills and CP

Apr.201270 tril.yen

(end-Jun.2013)Jun.2013

Started in Oct.2010

Latest Jul.2012

Cumulative change in amount

(Intended timescale for completing the purchases) (End-Dec 2011) (End-Jun 2013)

(A) (B) (B) – (A)

60

70

Oct.201155 tril.yen

(end-Dec 2012)

Feb.201265 tril.yen

(end-Dec.2012)

Dec.201265 tril.yen

70 tril.yenTotal size

About 35

About 70

About +35

Asset purchases 5.0 45.0 +40.0

50Mar.201140 tril.yen

Aug.201150 tril.yen

(end-Dec.2012)

(end-Dec.2012)JGBs 1.5 29.0 +27.5

T-Bills 2.0 9.5 +7.5

CP 0.5 2.1 +1.6

40 Pursuing powerful monetary easing in a

ti

y(end-Jun.

2012)Started in Oct.201035 tril.yen(end-Dec.

2011)

Corporate bonds 0.5 2.9 +2.4

ETFs 0.45 1.6 +1.15

0 0 0 12

20

30Maximum amount of the Asset Purchase ProgramActual amount of increase in the size of the Asset Purchase Program

continuous manner

Schedule

J-REITs 0.05 0.12 +0.07

Fixed-rate operation 30.0 25.0 - 5.0

Three-month term 20.0 ― ―

22Note: Dates in parentheses indicate the intended timescale for completing the increase.

20

10 12 2 4 6 8 10 12 2 4 6 8 10 12 2 4 6

g

CY2010 2011 2012 2013Six-month term 10.0 ― ―

Japan's Corporate Financial Conditions

Chart 22

Domestic Banks' Average Contracted Interest Rates ROA and Paid Interest Rate of Japanese Firms

1.7

1.8

Long-term

%

7

8ROA (operating profits/total assets)

Paid interest rate (interest expense/interest-

s.a., %

1.5

1.6Long term

Short-term5

6

Paid interest rate (interest expense/interestbearing debt)

1 2

1.3

1.4

3

4

1 0

1.1

1.2

1

2

0.9

1.0

0 7 0 8 0 9 1 0 1 1 1 2CY

0

85 87 89 91 93 95 97 99 01 03 05 07 09 11CY

23

Note: Average contracted interest rates are the six-month backward moving averages on new loans.Sources: Ministry of Finance; Bank of Japan.

Fund Provisioning to Support Strengthening the Foundations for Economic Growth

Chart 23

(Total Size: 5.5 tril. yen)

Main rulesSpecial rules for equity investments and asset-

based lending

Special rules for small-lot investments and loans

Special rules for U.S. dollar lending arrangementsbased lending arrangements

Time of establishment June 2010 June 2011 March 2012 April 2012

Maximum amountoutstanding 3.5 tril. yen 0.5 tril. yen 0.5 tril. yen 12 bil. U.S. dollarsoutstanding

Maximum amount of loans to each

counterparty

150 bil. yen (when combined with small-lot investments and loans)

50 bil. yen

150 bil. yen (when combined with

investments and loans made under main rules)

1 bil. U.S. dollars

)

Eligible investments and

loans

Those with a size of 10 mil. yen or more

Equity investments and ABL with a size of 1 mil.

yen or more

Those with a size of 1 mil. yen or more but less

than 10 mil. yen

Those denominated in foreign currencies with a size of 100 thous. U.S.

dollars or more

Duration of loans Maximum 4 years (including rollovers)

Maximum 4 years (including rollovers)

Maximum 4 years (including rollovers)

Maximum 4 years (including rollovers)

Loan ratesThe Bank's target for the

policy rate( )

The Bank's target for the policy rate

( )

The Bank's target for the policy rate

( )

6-month U.S. dollar LIBOR(0.1 percent per annum) (0.1 percent per annum) (0.1 percent per annum) LIBOR

Deadline for applications for new

loansMarch 31, 2014 March 31, 2014 March 31, 2014 March 31, 2014

Amount

24

Amount outstanding

(as of August 31, 2012)

3,131.4 bil. yen 106.9 bil. yen 3 bil. yen ――

Credit Ratings of Financial Institutions

Chart 24

Credit Ratings of Financial Institutions

United States Europe Japan

19

20Aaa

Aa119

20Aaa

Aa1 19

20Aaa

Aa1

17

18Aa2

Aa317

18Aa2

Aa3 17

18Aa2

Aa3

16

17

Deutsche Bank (A2)

A1

A215

16

17Aa3

A1

15

16

17

MUFG (Aa3)

A1

A2

14

15 BNP Paribas (A2)

UBS (A2)

A2

A314

15

Citibank (A3)

JP Morgan Chase Bank (Aa3)

A2

A3 14

15Mizuho/Mizuho Corporate Bank (A1)SMBC (Aa3)

A2

A3

13

00 02 04 06 08 10 12CY

13

00 02 04 06 08 10 12CY

13

00 02 04 06 08 10 12CY

25

Notes: 1. Ratings are based on long-term credit ratings issued by Moody's.2. Ratings in parentheses are most recent ratings.

Source: Moody's.