Not to be released until 2:00 p.m.

Japan Standard Time on

Thursday, January 19, 2023.
.

Outlook for Economic

Activity and Prices
January 2023

(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.
 Outlook for Economic Activity and Prices (January 2023)

The Bank's View1

Summary

 Japan's economy is likely to recover toward the middle of the projection period, with the
impact of the novel coronavirus (COVID-19) and supply-side constraints waning, although
it is expected to be under downward pressure stemming from high commodity prices and
slowdowns in overseas economies. Thereafter, as a virtuous cycle from income to
spending intensifies gradually, Japan's economy is projected to continue growing at a
pace above its potential growth rate.
 The year-on-year rate of increase in the consumer price index (CPI, all items less fresh
food) is likely to be relatively high in the short run due to the effects of a pass-through to
consumer prices of cost increases led by a rise in import prices. The rate of increase is
then expected to decelerate toward the middle of fiscal 2023 due to a waning of these
effects, as well as to the effects of pushing down energy prices from the government's
economic measures. Thereafter, it is projected to accelerate again moderately on the back
of improvement in the output gap, rises in medium- to long-term inflation expectations and
in wage growth, and a waning of the effects of the economic measures pushing down
energy prices toward the middle of fiscal 2023.
 Comparing the projections with those presented in the previous Outlook for Economic
Activity and Prices (Outlook Report), the projected growth rates for fiscal 2022 and 2023
are somewhat lower, mainly due to overseas economies deviating downward from the
previous baseline scenario, although the government's economic measures are likely to
make a positive contribution to the growth rates. The projected growth rate for fiscal 2024
is somewhat lower due to a waning of the effects of those measures pushing up the
economy of the previous year. The projected rates of increase in the CPI for fiscal 2022
and 2023 are more or less unchanged, as effects such as those of a pass-through to
consumer prices of cost increases led by a rise in import prices are likely to offset the
effects of pushing down energy prices from the economic measures. The projected rate of
increase in the CPI for fiscal 2024 is somewhat higher due to a waning of the effects of
those measures pushing down energy prices of the previous year.
 Concerning risks to the outlook, there remain extremely high uncertainties for Japan's
economy, including the following: developments in overseas economic activity and prices;
developments in the situation surrounding Ukraine and in commodity prices; and the
course of COVID-19 at home and abroad and its impact. In this situation, it is necessary to
pay due attention to developments in financial and foreign exchange markets and their
impact on Japan's economic activity and prices.
 With regard to the risk balance, risks to economic activity are skewed to the downside for
fiscal 2022 and 2023 but are generally balanced for fiscal 2024. Risks to prices are
skewed to the upside.

1 "The Bank's View" was decided by the Policy Board at the Monetary Policy Meeting held on January 17
and 18, 2023.

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

Japan's economy, despite being affected by factors such as high commodity prices, has
picked up as the resumption of economic activity has progressed while public health has
been protected from COVID-19. The pace of recovery in overseas economies has slowed.
Exports and industrial production have increased as a trend, with the effects of
supply-side constraints waning. Corporate profits have been at high levels on the whole,
and business sentiment has been more or less unchanged. In this situation, business
fixed investment has increased moderately. The employment and income situation has
improved moderately on the whole. Private consumption has increased moderately,
despite being affected by COVID-19. Housing investment has been relatively weak.
Public investment has been more or less flat. Financial conditions have been
accommodative on the whole, although weakness in firms' financial positions has
remained in some segments. On the price front, the year-on-year rate of change in the
CPI (all items less fresh food) has been in the range of 3.5-4.0 percent due to rises in
prices of such items as energy, food, and durable goods. Meanwhile, inflation
expectations have risen.

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

A. Baseline Scenario of the Outlook for Economic Activity

Toward the middle of the projection period, Japan's economy is likely to recover, with the
impact of COVID-19 and supply-side constraints waning and with support from
accommodative financial conditions and the government's economic measures, although
it is expected to be under downward pressure stemming from high commodity prices and
slowdowns in overseas economies.

In the household sector, regarding the employment situation, the number of regular
employees is expected to continue increasing, and a rise in that of non-regular employees
is likely to become evident with a recovery in the face-to-face services sector. In addition,
wage growth is expected to increase, reflecting tightening labor market conditions and
price rises. Due to these factors, employee income is projected to continue increasing
moderately. In this situation, although private consumption is expected to be under
downward pressure from the real income side due to price rises, it is projected to continue
increasing. This is mainly because pent-up demand is likely to materialize, supported by
household savings that had accumulated as a result of pandemic-related restrictions, as
the resumption of consumption activities progresses further while public health is being
protected. Private consumption is also likely to be underpinned by the government's
measures to reduce the household burden of higher gasoline prices, electricity charges,
and manufactured and piped gas charges, and by its domestic travel discount program. In
the corporate sector, although overseas economies are projected to slow, mainly due to

2
the impact of global inflationary pressure and policy interest rate hikes by central banks,
exports and production are likely to remain on an uptrend with the effects of supply-side
constraints waning and with support from high levels of order backlogs for automobiles
and capital goods. Inbound tourism demand, which is categorized under services exports,
is also expected to increase, mainly in reflection of the government's relaxation of entry
restrictions. Although high raw material costs are projected to exert downward pressure,
corporate profits are likely to remain at high levels on the whole, albeit with variation
across industries and firm sizes. This will likely occur due to continued improvement in
economic activity on the back of factors such as the materialization of pent-up demand. In
this situation, as accommodative financial conditions provide support and supply-side
constraints wane, business fixed investment is expected to continue increasing, including
investment to address labor shortage, digital-related investment, research and
development (R&D) investment related to growth areas and decarbonization, and
investment associated with strengthening supply chains. Meanwhile, public investment is
projected to be more or less flat, with expenditure related to building national resilience
continuing. Government consumption is expected to decline gradually in reflection of
developments in expenditure related to COVID-19.

From the middle of the projection period, Japan's economy is projected to continue
growing at a pace above its potential growth rate as a virtuous cycle from income to
spending intensifies gradually in the overall economy. That said, the pace of growth is
highly likely to decelerate due to a waning of the contribution from the materialization of
pent-up demand, as well as to a waning of the effects of the government's economic
measures pushing up the economy of the previous year.

In the household sector, employee income is likely to continue increasing on the back of a
moderate rise in the number of employees associated with improvement in economic
activity and of an increase in wage growth that reflects tightening labor market conditions
and price rises. Supported by this increase in employee income, private consumption is
expected to keep increasing steadily, although the materialization of pent-up demand is
likely to slow. In the corporate sector, exports and production are likely to increase
moderately with overseas economies picking up. Inbound tourism demand is expected to
continue increasing. Corporate profits are likely to follow an improving trend since
domestic and external demand is expected to increase and downward pressure stemming
from high raw material costs is likely to wane gradually. In this situation, with support from
accommodative financial conditions, business fixed investment is expected to continue
increasing.

Looking at the financial conditions on which the above outlook is based, it is expected that
they will remain accommodative as the Bank pursues Quantitative and Qualitative
Monetary Easing (QQE) with Yield Curve Control, and that this will support an increase in

3
private demand.2 That is, the environment for external funding, such as bank borrowing
and the issuance of CP and corporate bonds, is projected to remain accommodative. In
this situation, firms' financial positions are likely to continue on an improving trend along
with an economic recovery.

Meanwhile, the potential growth rate is expected to rise moderately. 3 This is mainly
because productivity is likely to increase due to advances in digitalization and investment
in human capital, and because capital stock growth is projected to accelerate due to a rise
in business fixed investment. These developments are likely to be encouraged by the
government's various measures and by accommodative financial conditions.

B. Baseline Scenario of the Outlook for Prices

The year-on-year rate of increase in the CPI (all items less fresh food) is likely to be
relatively high in the short run due to the effects of a pass-through to consumer prices of
cost increases led by a rise in import prices. The rate of increase is then expected to
decelerate toward the middle of fiscal 2023 due to a waning of these effects, as well as to
the effects of pushing down energy prices from the government's economic measures.
Thereafter, it is projected to accelerate again moderately on the back of improvement in
the output gap, rises in medium- to long-term inflation expectations and in wage growth,
and a waning of the effects of the economic measures pushing down energy prices
toward the middle of fiscal 2023. The government's measures to reduce the household
burden of higher gasoline prices, electricity charges, and manufactured and piped gas
charges are expected to push down the year-on-year rate of change in the CPI (all items
less fresh food), mainly for the first half of fiscal 2023. For fiscal 2024, on the other hand,
they are likely to push up the rate due to a waning of the effects of those measures
pushing down CPI inflation of the previous year. In this regard, looking at the CPI (all
items less fresh food and energy) -- which is not directly affected by fluctuations in energy
prices, such as in gasoline prices, electricity charges, and manufactured and piped gas
charges -- the year-on-year rate of change is projected to be at around 2 percent for fiscal
2022, in the range of 1.5-2.0 percent for fiscal 2023, and at around 1.5 percent for fiscal
2024.

The main factors that determine inflation rates are assessed as follows. The output gap,
which captures the utilization of labor and capital, has been marginally negative. With
Japan's economy following a growth path that outpaces its potential growth rate, the gap

2 Each Policy Board member makes their forecasts taking into account the effects of past policy decisions
and with reference to views incorporated in financial markets regarding the future conduct of policy.
3 Under a specific methodology, Japan's recent potential growth rate is estimated to be in the range of
0.0-0.5 percent. However, the rate should be interpreted with considerable latitude. This is because the
estimate is subject to change depending on the methodologies employed and could be revised as the
sample period becomes longer over time. In addition, there are particularly high uncertainties in the
current phase over how COVID-19 will affect the trends in productivity or labor supply.

4
is projected to turn positive around the second half of fiscal 2022 and then continue to
expand moderately. Under these circumstances, labor market conditions are expected to
tighten, partly due to a deceleration in the pace of increase in labor force participation of
women and seniors, and upward pressure on wages is projected to intensify gradually.
This is likely to put upward pressure on personnel expenses on the cost side and
contribute to an increase in households' purchasing power.

Medium- to long-term inflation expectations have risen, albeit at a moderate pace relative
to short-term ones. The December 2022 Tankan (Short-Term Economic Survey of
Enterprises in Japan) shows that the diffusion index (DI) for output prices has increased
and firms' inflation outlook for general prices has been at a high level, not only for the
short term but also for the medium to long term. Given that the formation of inflation
expectations in Japan is largely adaptive, an increase in actual inflation is expected to
bring about a rise in households' and firms' medium- to long-term inflation expectations
and, through changes in firms' price- and wage-setting behavior and in
labor-management wage negotiations, lead to a sustained rise in prices accompanied by
wage increases.

III. Risks to Economic Activity and Prices

A. Risks to Economic Activity

Regarding the aforementioned baseline scenario of the outlook for economic activity,
there are extremely high uncertainties, including the following: developments in overseas
economic activity and prices; developments in the situation surrounding Ukraine and in
commodity prices; and the course of COVID-19 at home and abroad and its impact.
Specifically, it is necessary to pay attention to the following upside and downside risks.

The first is developments in overseas economic activity and prices and in global financial
and capital markets. Although inflation rates, such as in the United States, are lower than
a while ago, inflationary pressure has remained on a global basis. In this situation,
overseas central banks have continued to raise their policy interest rates, and such moves
are projected to continue for the time being. On this point, it is expected in the baseline
scenario that inflation rates around the world will decline gradually and that overseas
economies will continue to grow moderately, albeit at a decelerating pace. That said,
vigilance against a wage-price spiral has remained high, mainly in advanced economies.
In addition, there is concern in global financial and capital markets over whether it is
possible to contain inflation and maintain economic growth simultaneously. With central
banks continuing to make policy interest rate hikes, there is a risk that global financial
conditions will tighten further through adjustments in asset prices, fluctuations in foreign
exchange markets, and capital outflows from emerging economies, and that this will
eventually lead to overseas economies deviating downward from the baseline scenario.

5
Taking this risk into account, it is necessary to pay due attention to developments in
financial and foreign exchange markets and their impact on Japan's economic activity and
prices.

The second factor is developments in the situation surrounding Ukraine and the
associated developments in prices of commodities, including grains. Depending on the
course of this situation, overseas economies, particularly the euro area, could be pushed
down further. In addition, although prices of commodities, including grains, have declined
on the whole after reaching their peak around the middle of last year, they could rise again
depending on, for example, developments in the situation surrounding Ukraine. Given that
Japan is an importer of commodities such as energy and grains (e.g., wheat), a rise in
these prices due to supply factors puts greater downward pressure on the economy
through an increase in import costs, as this rise is not accompanied by an expansion in
external demand or an increase in exports. Such deterioration in the terms of trade
squeezes corporate profits and households' real income, and this could lead business
fixed investment and private consumption to deviate downward from the baseline
scenario through more cautious spending behavior of firms and households. On the other
hand, if prices of commodities, including grains, see a clearer downtrend, the economy
could deviate upward. On this point, in the baseline scenario, commodity prices are
assumed to decline moderately on the whole toward the end of the projection period with
reference, for example, to developments in futures markets. However, there are extremely
high uncertainties, such as over geopolitical factors -- particularly the situation
surrounding Ukraine -- and global efforts toward addressing climate change.

The third factor is how COVID-19 at home and abroad will affect private consumption and
firms' export and production activities. Although COVID-19 has resurged in Japan since
last autumn, private consumption has increased moderately thus far -- supported by
pent-up demand, especially for services consumption -- and the resumption of
consumption activities has progressed steadily while public health has been protected.
That said, depending on the course of COVID-19, upward pressure from pent-up demand
could weaken by more than expected. On the other hand, if vigilance against COVID-19
lessens significantly, household savings that had accumulated as a result of
pandemic-related restrictions could be withdrawn by more than expected and private
consumption could be pushed up. In the meantime, supply-side constraints have
remained in part, and if COVID-19 resurges at home and abroad in this situation, such
constraints could intensify again through, for example, supply-chain disruptions. If this
happens, Japan's exports and production could be pushed down and the adverse impact
could even spill over to goods consumption and business fixed investment.

The fourth factor considered from a somewhat long-term perspective is firms' and
households' medium- to long-term growth expectations. It is expected that efforts with a
view to the post-COVID-19 era, digitalization, and decarbonization will change Japan's

6
economic structure and people's working styles. In addition, the heightened geopolitical
risks could change the trend of globalization, which has supported the growth of the global
economy to date. Depending on how firms and households react to these changes, their
medium- to long-term growth expectations, the potential growth rate, and the output gap
could go either upward or downward.

B. Risks to Prices

If the aforementioned risks to economic activity materialize, prices also are likely to be
affected. In addition, it is necessary to pay attention to the following two risks that are
specific to prices.

The first is high uncertainties over firms' price- and wage-setting behavior, which could
exert either upward or downward pressure on prices. Recently, against the backdrop of
high raw material costs, price hikes have been widely observed even among firms that
had taken a cautious stance toward changing their selling prices, while their pricing
decisions have been made in consideration of price setting by competitors. Depending on
how much upward pressure will be exerted by raw material costs and on how firms'
inflation expectations will develop, the pass-through of cost increases could accelerate by
more than expected and lead prices to deviate upward from the baseline scenario. In
addition, there is a possibility that wages and prices will rise by more than expected as
more firms reflect price developments in wage setting through labor-management wage
negotiations. On the other hand, there is a risk that moves to increase wages will not
strengthen as much as expected and prices will deviate downward from the baseline
scenario, with the deeply entrenched behavior and mindset based on the assumption that
prices and wages will not increase easily.

The second risk is future developments in foreign exchange rates and international
commodity prices, as well as the extent to which such developments will spread to import
prices and domestic prices. This risk may lead prices to deviate either upward or
downward from the baseline scenario. Fluctuations in international commodity prices
have been significant, reflecting high uncertainties over, for example, developments in the
situation surrounding Ukraine, while inflation rates have remained high on a global basis
and foreign exchange markets have fluctuated sharply. How these factors will affect
Japan's prices requires due attention.

7
IV. Conduct of Monetary Policy

In the context of the price stability target, the Bank assesses the aforementioned
economic and price situation from two perspectives and then outlines its thinking on the
future conduct of monetary policy.4

The first perspective involves an examination of the baseline scenario of the outlook. The
year-on-year rate of change in the CPI has been above 2 percent. The rate of increase,
however, is expected to decelerate to a level below 2 percent toward the middle of fiscal
2023. Although it will take time, underlying CPI inflation is likely to increase gradually
toward achieving the price stability target, mainly on the back of improvement in the
output gap and rises in medium- to long-term inflation expectations and in wage growth.

The second perspective involves an examination of the risks considered most relevant to
the conduct of monetary policy. Concerning risks to the outlook, there remain extremely
high uncertainties for Japan's economy, including the following: developments in
overseas economic activity and prices; developments in the situation surrounding Ukraine
and in commodity prices; and the course of COVID-19 at home and abroad and its impact.
In this situation, it is necessary to pay due attention to developments in financial and
foreign exchange markets and their impact on Japan's economic activity and prices. With
regard to the risk balance, risks to economic activity are skewed to the downside for fiscal
2022 and 2023 but are generally balanced for fiscal 2024. Risks to prices are skewed to
the upside. On the financial side, overheating has not been seen in asset markets and
financial institutions' credit activities. Japan's financial system has maintained stability on
the whole. Although attention is warranted on, for example, the impact of the tightening of
global financial conditions, the financial system is likely to remain highly robust on the
whole even in the case of an adjustment in the real economy at home and abroad and in
global financial markets, mainly because financial institutions have sufficient capital bases.
When examining financial imbalances from a longer-term perspective, if downward
pressure on financial institutions' profits, such as from low interest rates, the declining
population, and excess savings in the corporate sector, becomes prolonged, this could
create a risk of a gradual pullback in financial intermediation. On the other hand, under
these circumstances, the vulnerability of the financial system could increase, mainly due
to the search for yield behavior. Although these risks are judged as not significant at this
point, it is necessary to pay close attention to future developments.

As for the conduct of monetary policy, the Bank will continue with QQE with Yield Curve
Control, 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 continue expanding the monetary

4 As for the examination from two perspectives in the context of the price stability target, see the Bank's
statement released on January 22, 2013, entitled "The 'Price Stability Target' under the Framework for the
Conduct of Monetary Policy."

8
base until the year-on-year rate of increase in the observed CPI (all items less fresh food)
exceeds 2 percent and stays above the target in a stable manner.

For the time being, while closely monitoring the impact of COVID-19, the Bank will support
financing, mainly of firms, and maintain stability in financial markets, and will not hesitate
to take additional easing measures if necessary; it also expects short- and long-term
policy interest rates to remain at their present or lower levels.

9
 (Appendix)
Forecasts of the Majority of the Policy Board Members
y/y % chg.

CPI (all items less (Reference)

Real GDP
fresh food) CPI (all items less
fresh food and energy)

+1.9 to +2.0 +3.0 to +3.0 +2.1 to +2.1

Fiscal 2022
[+1.9] [+3.0] [+2.1]

+1.8 to +2.1 +2.8 to +2.9 +1.8 to +1.9

Forecasts made in October 2022
[+2.0] [+2.9] [+1.8]

+1.5 to +1.9 +1.6 to +1.8 +1.7 to +1.9

Fiscal 2023
[+1.7] [+1.6] [+1.8]

+1.5 to +2.0 +1.5 to +1.8 +1.5 to +1.8

Forecasts made in October 2022
[+1.9] [+1.6] [+1.6]

+0.9 to +1.3 +1.8 to +1.9 +1.5 to +1.8

Fiscal 2024
[+1.1] [+1.8] [+1.6]

+1.3 to +1.6 +1.5 to +1.9 +1.5 to +1.8

Forecasts made in October 2022
[+1.5] [+1.6] [+1.6]

Notes: 1. Figures in brackets indicate the medians of the Policy Board members' forecasts (point estimates).
2. The forecasts of the majority of the Policy Board members are constructed as follows: each Policy Board
member's forecast takes the form of a point estimate -- namely, the figure to which they attach the highest
probability of realization. These forecasts are then shown as a range, with the highest figure and the lowest figure
excluded. The range does not indicate the forecast errors.
3. Each Policy Board member makes their forecasts taking into account the effects of past policy decisions and with
reference to views incorporated in financial markets regarding the future conduct of policy.

10
 Policy Board Members' Forecasts and Risk Assessments

(1) Real GDP

y/y % chg. y/y % chg.
3.0 3.0

2.0 2.0

1.0 1.0

0.0 0.0

-1.0 -1.0

-2.0 -2.0

-3.0 -3.0

-4.0 -4.0

-5.0 -5.0
FY
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

(2) CPI (All Items Less Fresh Food)

y/y % chg. y/y % chg.
4.0 4.0

3.0 3.0

2.0 2.0

1.0 1.0

0.0 0.0

-1.0 -1.0
2016
FY 2017 2018 2019 2020 2021 2022 2023 2024 2025
Notes: 1. The solid lines show actual figures, while the dotted lines show the medians of the Policy Board
members' forecasts (point estimates).
2. The locations of , △, and ▼ in the charts indicate the figures for each Policy Board member's forecasts
to which they attach the highest probability. The risk balance assessed by each Policy Board member is
shown by the following shapes: indicates that a member assesses "upside and downside risks as
being generally balanced," △ indicates that a member assesses "risks are skewed to the upside," and ▼
indicates that a member assesses "risks are skewed to the downside."

11
The Background5

I. Current Situation of Economic Activity

and Its Outlook

A. Economic Developments

Japan's economy, despite being affected by Chart 1: Real GDP

factors such as high commodity prices, has 1. Level
s.a., ann., tril. yen
picked up as the resumption of economic activity 580

has progressed while public health has been

560
protected from COVID-19.
540

520
Real GDP increased clearly for the April-June
quarter of 2022, registering 1.1 percent on a 500

quarter-on-quarter basis and 4.5 percent on an

480
annualized basis (Chart 1). It then decreased
slightly for the July-September quarter, registering 460
CY 07 09 11 13 15 17 19 21
minus 0.2 percent on a quarter-on-quarter basis
and minus 0.8 percent on an annualized basis.
The decrease was mainly due to the surge in 2. Annualized Quarterly Growth Rate
s.a., ann., q/q % chg.
imports of services caused by temporary factors. 25
20
Looking at final demand, exports and business
15
fixed investment increased, mainly on the back of 10
a waning of supply-side constraints, and private 5
0
consumption increased slightly, despite being
-5
affected by the spread of COVID-19 last summer. -10
With this pick-up in the economy, the output gap -- -15 Private demand
-20 Public demand
which captures the utilization of labor and capital
-25 Net exports
-- for the July-September quarter was negative -30 Real GDP

but improved from the previous quarter (Chart 2). -35

CY 12 13 14 15 16 17 18 19 20 21 22
Source: Cabinet Office.

Monthly indicators and high-frequency data since

then suggest that Japan's economy has
continued to pick up. In the corporate sector,

5
"The Background" provides explanations of "The Bank's View"
decided by the Policy Board at the Monetary Policy Meeting held
on January 17 and 18, 2023.

12
exports have increased as a trend, with the
Chart 2: Output Gap
effects of supply-side constraints waning. While % inverted, DI ("excessive" - "insufficient"), % points
8 -40
corporate profits have remained at high levels on Output gap (left scale)
6 -30
the whole despite being affected by high
4 Tankan factor utilization -20
commodity prices, business sentiment has been index (right scale)
2 -10
more or less unchanged. In this situation,
0 0
business fixed investment has increased
-2 10
moderately, and the business fixed investment
-4 20
plan for fiscal 2022 in the December 2022 Tankan
-6 30
indicates that investment is expected to see a
-8 40
clear rise. In the household sector, private CY 85 90 95 00 05 10 15 20
Source: Bank of Japan.
consumption has increased moderately, partly Notes: 1. Figures for the output gap are staff estimates.
2. The Tank an factor utilization index is calculated as the weighted average of the
owing to the effects of the government's domestic production capacity DI and the employment conditions DI for all industries and
enterprises. The capital and labor shares are used as weights. There is a
discontinuity in the data for December 2003 due to a change in the survey
travel discount program, as the resumption of framework.
3. Shaded areas denote recession periods.

consumption activities has progressed while

public health has been protected. The
employment and income situation has improved
moderately on the whole, as labor market
conditions have tightened while the economy has
continued to pick up, as just described.

Japan's economy is likely to recover toward the

middle of the projection period, with the impact of
COVID-19 and supply-side constraints waning
and with support from accommodative financial
conditions and the government's economic
measures, although it is expected to be under
downward pressure stemming from high
commodity prices and the slowdowns in overseas
economies. 6
Thereafter, the economy is
projected to continue growing at a pace above its

6
The government formulated the Comprehensive Emergency
Measures to Counter Soaring Crude Oil and Other Prices under
the COVID-19 Pandemic in April 2022 and the Comprehensive
Economic Measures for Overcoming Price Increases and
Revitalizing the Economy in October. The implementation of the
budget based on these measures is expected to mainly push up
government consumption and private consumption, and thereby
support economic activity.

13
potential growth rate as a virtuous cycle from
Chart 3: Potential Growth Rate
income to spending intensifies gradually in the y/y % chg.
5
overall economy. That said, the pace of growth is Total factor productivity

highly likely to decelerate due to a waning of the 4 Capital input

Labor input
contribution from the materialization of pent-up 3 Potential growth rate

demand, as well as to a waning of the effects of

2
the government's economic measures pushing up
1
the economy of the previous year. Comparing the
projections with those presented in the previous 0

Outlook Report, the projected growth rates for -1

fiscal 2022 and 2023 are somewhat lower, mainly
-2
due to overseas economies deviating downward FY 85 90 95 00 05 10 15 20
Source: Bank of Japan.
from the previous baseline scenario, although the Note: Figures are staff estimates.

economic measures are likely to make a positive

contribution to the growth rates. The projected
growth rate for fiscal 2024 is somewhat lower due
to a waning of the effects of those measures
pushing up the economy of the previous year.

The potential growth rate seems to have been in

the range of 0.0-0.5 percent recently (Chart 3).
This is because, although the growth rate of total
factor productivity (TFP) has increased slightly,
working hours have continued on a downtrend,
reflecting working-style reforms, and growth in
capital stock has decelerated as a result of past
declines in business fixed investment. As for the
outlook, the potential growth rate is expected to
rise moderately. This is based on the projection
that (1) the TFP growth rate will increase
moderately, mainly on the back of advances in
digitalization and investment in human capital and
a resultant improvement in efficiency of resource
allocation, (2) the pace of decline in working
hours will slow with the effects of working-style
reforms diminishing, and (3) growth in capital
stock will accelerate cyclically. These
developments are likely to be encouraged by the

14
government's various measures and by
accommodative financial conditions. However, in
terms of labor, it is highly uncertain what kind of
working style will take hold going forward, given
the experience of the pandemic and with
demographic changes. In addition, in the
corporate sector, there remain high uncertainties
over the extent of advancement and sustainability
of innovation and sectoral reallocation of
production factors, both of which aim at adapting
to the post-pandemic economic and industrial
structures, including efforts toward digitalization
and addressing climate change. It is also possible
that the heightened geopolitical risks and other
factors will have a significant impact on corporate
behavior. Under these circumstances, the output
gap and the potential growth rate, which are
estimated based on a specific assumption
regarding trends, should be interpreted with some
latitude.

Details of the outlook for each fiscal year are as

follows. In the second half of fiscal 2022, Japan's
economy is likely to recover. This is because,
although the economy is expected to be under
downward pressure stemming from high
commodity prices and the slowdowns in overseas
economies, it is projected that the impact of
COVID-19 on services consumption will wane
and the effects of supply-side constraints will
ease. Another reason is that accommodative
financial conditions and the government's
economic measures are likely to provide support.
Specifically, while goods exports are likely to be
affected by the slowdowns in overseas
economies, they are expected to remain on an
uptrend, with support from a waning of
supply-side constraints and high levels of order

15
backlogs for automobiles and capital goods.
Inbound tourism demand, which is categorized
under services exports, is projected to increase,
mainly in reflection of the government's relaxation
of entry restrictions. In the household sector,
employee income is likely to continue increasing
moderately on the back of a continued increase in
employment and an increase in wage growth,
particularly for part-time employees. In this
situation, private consumption is expected to be
pushed down by deterioration in real income due
to price rises. However, it is projected to continue
increasing because pent-up demand is likely to
materialize, supported by household savings that
had accumulated as a result of pandemic-related
restrictions, as the resumption of consumption
activities progresses further while public health is
being protected. Private consumption is also likely
to be underpinned by the government's measures
to reduce the household burden of higher
gasoline prices, electricity charges, and
manufactured and piped gas charges, and by its
domestic travel discount program. With corporate
profits being at high levels on the whole, business
fixed investment is expected to continue
increasing on the back of accommodative
financial conditions and the waning of supply-side
constraints. Overall government spending is
projected to decrease somewhat. This is because,
although expenditure related to COVID-19 is
expected to remain at a high level, due in part to
the formulation of economic measures, public
investment is likely to decrease, given that the
implementation of the fiscal 2022 budget for it
was front-loaded in the first half of the fiscal year.

In fiscal 2023, the growth rate of Japan's

economy is projected to remain relatively high,

16
partly supported by accommodative financial
conditions and the government's economic
measures. However, with the remaining effects of
the slowdowns in overseas economies, it is likely
to decelerate somewhat, mainly reflecting slower
materialization of pent-up demand. Japan's goods
exports are projected to remain on an uptrend as
the effects of supply-side constraints dissipate,
although such exports will likely continue to be
affected by the slowdowns in overseas
economies. Inbound tourism demand is projected
to keep increasing. Business fixed investment is
expected to continue increasing, including
investment to address labor shortage,
digital-related investment, investment related to
growth areas and decarbonization, and
investment associated with strengthening supply
chains. In the household sector, employee
income is likely to continue rising. This is because,
reflecting tightening labor market conditions and
price rises, wage growth is expected to rise not
only for part-time employees but also full-time
employees. In addition, downward pressure on
households' real income stemming from high
prices is projected to ease on the back of a
waning of the effects of a pass-through to
consumer prices of cost increases led by a rise in
import prices, as well as the government's various
measures. In this situation, private consumption is
also expected to keep increasing as it is projected
that pent-up demand will continue to materialize,
albeit more slowly. Although progress in
construction related to building national resilience
and an uptrend in healthcare and nursing care
expenditures are likely to provide support,
government spending is expected to decline,
reflecting a reduction in expenditure related to
COVID-19.

17
In fiscal 2024, the pace of economic growth is
likely to decelerate, mainly due to a waning of
pent-up demand and of the effects of the
government's economic measures pushing up the
economy of the previous year. However, Japan's
economy is expected to continue growing at a
pace somewhat above its potential growth rate,
with accommodative financial conditions being
maintained. Goods exports are likely to increase
moderately on the back of a pick-up in overseas
economies. Inbound tourism demand is projected
to keep increasing. Business fixed investment is
also expected to continue increasing, although it
is likely to see deceleration in the pace of
increase due to adjustment pressure stemming
from the accumulation of capital stock. Although
pent-up demand is likely to wane and a waning of
the effects of the government's economic
measures pushing down prices of the previous
year is expected to push down real income
through price rises, private consumption is
projected to continue increasing steadily as
employee income continues to improve.
Government spending is expected to turn to a
moderate increase on the back of progress in
construction related to building national resilience
and of an uptrend in healthcare and nursing care
expenditures.

18
B. Developments in Major Expenditure
Items and Their Background

Government Spending

Public investment has been more or less flat Chart 4: Public Investment
s.a., ann., tril. yen s.a., ann., tril. yen
(Chart 4). The amount of public construction 25 31
Public construction completed
completed -- a coincident indicator -- has been 24 (nominal, left scale) 30
Public investment (real, right scale)
more or less flat with progress in construction 23 29

based on the government's economic measures, 22 28

including construction related to building national 21 27

resilience. After increasing due to the effects of 20 26

the front-loaded implementation of the budget for 19 25

public investment, the value of public works 18 24

contracted and orders received for public 17 23

construction -- both of which are leading 16 22

CY 12 13 14 15 16 17 18 19 20 21 22
indicators -- have turned to a decrease. Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Note: The figure for 2022/Q4 is that for October.

As for the outlook, although public investment is

likely to decrease for the time being due to a
decline following the front-loaded implementation
of the budget, it is then projected to be more or
less flat, with expenditure related to building
national resilience continuing. 7 Government
consumption is likely to remain at a high level as a
result of expenditure related to COVID-19, such
as regarding vaccination. Thereafter, it is
projected to see a temporary lowering in its level
due to the reduction in such expenditure. Toward
the end of the projection period, however,
government consumption is likely to return to an

7
The five-year acceleration measures for building national
resilience with a project size of about 15 trillion yen were decided
by the Cabinet in December 2020. In these measures, public
investment projects for disaster prevention, disaster mitigation,
and building national resilience are to be implemented intensively
over five years from fiscal 2021 through fiscal 2025. The
government's economic measures decided by the Cabinet in
October 2022 also include efforts to implement the acceleration
measures.

19
increasing trend, reflecting an uptrend in
Chart 5: Overseas Economies
healthcare and nursing care expenditures. y/y % chg.
10
IMF
8 projections

Overseas Economies 6
4
The pace of recovery in overseas economies has 2
slowed (Chart 5). By region, the U.S. economy 0
has remained on a slowing trend, in reflection of -2 Overseas total
price rises and continued policy interest rate hikes, -4 Advanced economies

although firmness has been seen in private -6 Emerging and commodity-exporting

economies
consumption. European economies have -8
CY 90 95 00 05 10 15 20
recovered moderately, but slowdowns have been Sources: IMF; Ministry of Finance.
Note: Figures are the weighted averages of real GDP growth rates using countries' share
in Japan's exports as weights. The real GDP growth rates are compiled by the IMF,
observed as these economies have continued to and the rates from 2022 onward are its projections in the October 2022 World
Economic Outlook (WEO). Figures for advanced economies are those for the
be affected by the situation surrounding Ukraine. United States, the euro area, and the United Kingdom. Figures for emerging and
commodity-exporting economies are those for the rest of the world.

With adjustments continuing to be made in its real

Chart 6: Global PMI
estate market, the Chinese economy has slowed, s.a., DI
60
reflecting the impact of the spread of COVID-19 in
55
the country. Emerging and commodity-exporting
50
economies other than China have picked up on
45
the whole, albeit with weakness seen in part.
Among those in Asia, which are closely related to 40

Japan's economy, the NIEs and the ASEAN 35

economies have recovered on the whole because 30

Manufacturing
domestic demand has continued to improve with 25
Services
progress in the resumption of economic activity, 20
although some weakness has been observed in CY 07 09 11 13 15 17 19 21
Source: Copyright © 2023 by S&P Global Market Intelligence, a division of S&P Global
Inc. All rights reserved.
exports, particularly of IT-related goods. Looking Note: Figures for manufacturing are the J.P.Morgan Global Manufacturing PMI. Figures
for services are the J.P.Morgan Global Services Business Activity Index.
at the Global PMI to see the current situation for
the global economy, figures for both the Chart 7: World Trade Volume
s.a., CY 2010=100
manufacturing and services industries have 140

declined and been somewhat below 50, the

130
break-even point between improvement and
deterioration in business conditions (Chart 6). The 120

world trade volume has been on an uptrend

110
despite being affected by such slowdowns in
overseas economies, on the back of factors such 100

as a waning of supply-side constraints (Chart 7).

90

80
CY 07 09 11 13 15 17 19 21
Source: CPB Netherlands Bureau for Economic Policy Analysis.
Note: Figures for the world trade volume are those for world real imports. The figure for
2022/Q4 is that for October.

20
As for the outlook, although the effects of
Chart 8: Effective Exchange Rates
supply-side constraints are likely to wane, CY 2010=100
160
overseas economies are expected to slow toward Yen
140 appreciation
the middle of the projection period, albeit with
Yen
variation across countries and regions. This will 120 depreciation

likely occur in reflection of the situation

100
surrounding Ukraine and the impact of COVID-19
80
in China, in addition to inflationary pressure
exerted on a global basis and policy interest rate 60

hikes by overseas central banks. By region, the 40

Real effective exchange rate
Nominal effective exchange rate
U.S. economy is expected to slow due to a
20
decline in real disposable income stemming from CY 80 85 90 95 00 05 10 15 20
Source: BIS.
price rises and the impact of policy interest rate Note: Figures are based on the broad effective exchange rate indices. Figures prior to
1994 are calculated using the narrow indices.

hikes. European economies are also likely to slow,

reflecting the situation surrounding Ukraine and
the impact of policy interest rate hikes. The
Chinese economy is projected to gradually head
toward a pick-up as the resumption of economic
activity progresses while public health is being
protected. However, its pace of growth is
expected to become moderate, partly due to
adjustment pressure remaining on the
employment and income side and in the real
estate market. The paces of improvement in
emerging and commodity-exporting economies
other than China are likely to decelerate gradually,
partly in reflection of external demand slowing,
although the resumption of economic activity is
expected to underpin domestic demand.

In sum, overseas economies are projected to

slow toward the middle of the projection period;
however, downward pressure on them is likely to
ease in steps thereafter as inflation rates decline
gradually, mainly reflecting policy interest rate
hikes by central banks. For this reason, overseas
economies are likely to pick up, particularly in
advanced economies. In addition, growth in

21
emerging economies is also projected to
Chart 9: Real Exports and Imports
accelerate gradually, partly because adjustment s.a., CY 2015=100 s.a., % of real GDP
120 10
pressure in China is expected to wane in steps,
110 8
owing to factors such as progress in the
resumption of economic activity while public 100 6

health is being protected, and because 90 4

improvement in advanced economies and the 80 2

Chinese economy is likely to spread to emerging 70 0
and commodity-exporting economies other than
60 -2
Real trade balance (right scale)
China.
50 Real exports (left scale) -4
Real imports (left scale)
40 -6
CY 07 09 11 13 15 17 19 21
Exports and Imports Sources: Bank of Japan; Ministry of Finance; Cabinet Office.
Note: Based on staff calculations. Figures for 2022/Q4 are October-November averages.

Exports have increased as a trend, with the

Chart 10: Real Exports by Region
effects of supply-side constraints waning (Chart 9). s.a., 2017/Q1=100 s.a., 2017/Q1=100
130 130
By region, exports to advanced economies have
120 120
increased, mainly for automobile-related and
110 110
capital goods, also with the effects of supply-side
100 100
constraints waning (Chart 10). As for exports to
90 90
emerging economies, those to China have been
80 80
somewhat weak, particularly for intermediate and
70 70
China
IT-related goods. While exports to the NIEs, the <21.6> 60
60
United States <17.8> NIEs, ASEAN, etc.
ASEAN economies, and some other Asian 50
<36.3>
50
EU <9.2> Other economies
economies have remained at high levels for 40
<15.0>
40
capital goods (e.g., semiconductor production CY 17 18 19 20 21 22 17 18 19 20 21 22
Sources: Bank of Japan; Ministry of Finance.

equipment), they have been weak for

Notes: 1. Based on staff calculations. Figures in angular brackets show the share of each
country or region in Japan's total exports in 2021. Figures for 2022/Q4 are
October-November averages.
intermediate and IT-related goods. By goods, 2. Figures for the EU exclude those for the United Kingdom for the entire period.

exports of automobile-related goods have

Chart 11: Real Exports by Type of Goods
increased moderately, as the tightness in global s.a., 2017/Q1=100 s.a., 2017/Q1=100
140 140
Intermediate goods
supply and demand conditions for <22.4>
130 130
Motor vehicles and
semiconductors used in automobiles has related goods <20.6>
120 120
gradually eased on the whole (Chart 11). Exports
110 110
of capital goods have increased, supported by
100 100
high levels of order backlogs, although orders for
90 90
semiconductor production equipment, for
80 80
example, have seen a pause. In contrast, exports IT-related goods
70 <21.4> 70
of IT-related goods have been somewhat weak on Capital goods
60 <17.8> 60
the whole, albeit with fluctuations, with stronger
50 50
adjustment pressure on electronic parts such as CY 17 18 19 20 21 22 17 18 19 20 21 22
Sources: Bank of Japan; Ministry of Finance.
Note: Based on staff calculations. Figures in angular brackets show the share of each
type of goods in Japan's total exports in 2021. Figures for 2022/Q4 are October-
November averages.

22
semiconductors for smartphones and for personal
Chart 12: Japan's Share of Exports in
computers, although demand for World Trade Volume
automobile-related goods has been firm. Exports 5.8
s.a., %

of intermediate goods have been on a downtrend 5.6

against the background of the slowdown in the 5.4
Chinese economy and weakness in global 5.2

demand for IT-related goods. 5.0

4.8

4.6

Exports are likely to follow an uptrend toward the 4.4

middle of the projection period, supported by the 4.2

waning of supply-side constraints and high levels 4.0

CY 07 09 11 13 15 17 19 21
of order backlogs for automobiles and capital Source: CPB Netherlands Bureau for Economic Policy Analysis.
Note: Japan's share of exports in world trade volume is obtained by dividing Japan's real
goods, although they are expected to be affected exports by world real imports (2010 prices). The figure for 2022/Q4 is that for
October.

by the slowdowns in overseas economies.

Thereafter, as overseas economies pick up,
exports are projected to increase moderately.

Meanwhile, Japan's share of exports in the world

trade volume has been at a low level recently,
mainly because the effects of supply-side
constraints on Japan's exports of automobiles
have remained (Chart 12). As such temporary
factors dissipate, Japan's share of exports is likely
to increase gradually.

Imports have continued to increase, reflecting a

pick-up in domestic demand (Chart 9). They are
expected to follow a moderate uptrend on the
back of developments in induced demand due to
increases in domestic demand and exports.

External Balance

The nominal current account balance has

improved somewhat recently, mainly reflecting a
decline in import prices and improvement in the

23
travel balance, after its surplus had continued to
decrease significantly, owing to factors such as
Chart 13: Current Account
s.a., ann., tril. yen
40
the impact of high commodity prices (Chart 13).
30
Although the trade balance has also improved
somewhat recently, mainly on the back of the 20

decline in import prices, it has continued to 10

register a significant deficit. The services balance 0

deficit has decreased despite a continued -10
Trade balance
increasing trend in payments for digital-related Services balance
-20
Primary income balance
services, mainly because the travel balance has
-30 Secondary income balance
improved due to an increase in inbound tourism Current account balance
-40
demand (Chart 14).8 Meanwhile, the surplus in CY 12 13 14 15 16 17 18 19 20 21 22
Source: Ministry of Finance and Bank of Japan.
the primary income balance has remained at a Note: Figures for 2022/Q4 are October-November averages.

high level.
Chart 14: Number of Inbound Visitors
s.a., ann., mil. persons
35
Other
The nominal current account balance is likely to 30
North America
and Europe
follow a moderate improving trend. This is based 25 ASEAN

on the projection that (1) the surplus in the NIEs

20
primary income balance will be at a high level, (2) China
15
the trade deficit will decline moderately due to
factors such as an increase in goods exports, and 10

(3) the deficit in the services balance will 5

decrease due to the recovery in inbound tourism
0
demand. In terms of the savings-investment CY 12 13 14 15 16 17 18 19 20 21 22
Source: Japan National Tourism Organization (JNTO).
balance, overall excess savings in Japan's Note: Figures for North America and Europe are those for the United States, Canada, the
United Kingdom, France, and Germany. Figures for 2022/Q4 are October-November
averages.
economy are projected to remain at a low level in
the short run but thereafter follow a moderate
expanding trend, because the fiscal balance is
Chart 15: Savings-Investment Balance
4-quarter backward moving avg., ann., tril. yen
100
likely to improve at a pace that somewhat Excess savings
80
exceeds the pace of decline in excess savings in
60 Excess investment
the private sector (Chart 15).
40
20
0
Industrial Production
-20
-40
Industrial production has increased as a trend, Household sector
-60 Corporate sector
with the effects of supply-side constraints waning General government
-80
Domestic savings-investment balance
-100
8
Box 1 outlines recent developments in inbound tourism demand. CY 12 13 14 15 16 17 18 19 20 21 22
Source: Bank of Japan.

24
(Chart 16). By major industry, production of
"transport equipment" has been on a moderate Chart 16: Industrial Production
s.a., CY 2015=100
120
uptrend, as the tightness in global supply and
demand conditions for semiconductors used in
automobiles has gradually eased on the whole. 110

Production of "electrical machinery, and

information and communication electronics 100
equipment" has increased for on-board
equipment for motor vehicles. That for personal Production
90
computers and peripheral devices has also
Inventories
increased, partly due to renewal demand in view
80
of the end to support for some operating systems. CY 07 09 11 13 15 17 19 21 23
Source: Ministry of Economy, Trade and Industry (METI).
Supported by order backlogs, production of Notes: 1. Shaded areas denote recession periods.
2. Figures denoted by the round markers are calculated based on METI
projections for December 2022 and January 2023. The inventories figure for
"general-purpose, production, and 2022/Q4 is that for November.

business-oriented machinery" has been at a high

level, albeit with fluctuations stemming from
orders related to large-scale projects. On the
other hand, with stronger adjustment pressure,
particularly on memory for smartphones and
personal computers, production of "electronic
parts and devices" has continued to decrease
significantly despite firm demand for those related
to automobiles. While inventories of "chemicals
(excluding medicine)" have been at relatively high
levels, their production has been relatively weak,
reflecting the slowdown in the Chinese economy
and weakness in global demand for IT-related
goods.

Industrial production is likely to follow an uptrend

toward the middle of the projection period,
supported by the waning of supply-side
constraints and high levels of order backlogs for
automobiles and capital goods, although it is
expected to be affected by the slowdowns in
overseas economies. Thereafter, production is
projected to increase moderately on the back of a
rise in domestic and external demand.

25
Corporate Profits

Corporate profits have been at high levels on the Chart 17: Indicators Related to Corporate
Profits
whole. According to the Financial Statements 1. Sales and Current Profits
s.a., tril. yen s.a., tril. yen
Statistics of Corporations by Industry, Quarterly 400 25

(FSSC), current profits for all industries and

380
20
enterprises for the July-September quarter of
2022 declined slightly from the previous quarter, 360
15
although they continued to be at high levels 340
(Chart 17[1]). In detail, while current profits have 10
320
been pushed up by the waning of the effects of
Sales (left scale)
supply-side constraints and by an increase in 5
300
Current profits
dividend receipts, mainly from overseas (right scale)
280 0
subsidiaries reflecting the past depreciation of the CY 07 09 11 13 15 17 19 21
Source: Ministry of Finance.
yen, they have been pushed down by factors Notes: 1. Based on the Financial Statements Statistics of Corporations by Industry,
Quarterly. Excluding "finance and insurance."
2. Figures from 2009/Q2 onward exclude pure holding companies.
such as deterioration in the terms of trade 3. Shaded areas denote recession periods.

resulting from a rise in input prices and lower 2. Contribution to Changes in Trading
Gains and Losses
y/y chg., % points
inventory valuation due to a recent decline in 4
commodity prices (Chart 17[2]). By industry and 3
firm size, current profits of large manufacturers in 2
the processing industry have risen on the back of 1
increased sales that partly reflect the waning of 0
supply-side constraints. However, current profits -1
of large manufacturers as a whole have declined -2
Other
slightly from the peak level marked in the previous -3
Commodity prices, etc.
Exchange rates
Trading gains/losses-real GDP ratio
quarter, mainly due to lower inventory valuation in -4
the basic materials industry that reflects the CY 07 09 11 13 15 17 19 21
Sources: Cabinet Office; Bank of Japan.
Notes: 1. The contribution of changes in commodity prices, etc. is calculated using changes
decline in commodity prices. Current profits of in export/import price indexes on a contract currency basis. The contribution of
changes in exchange rates is calculated using the difference between
export/import price indexes on a yen basis and those on a contract currency basis.
small and medium-sized manufacturers have "Other" is the contribution of other factors such as changes in quantities.
2. Trading gains/losses = (Nominal net exports / Weighted average of export and
import deflators) – Real net exports
been more or less flat because, despite an
increase in sales, the extent to which they pass
on cost increases to selling prices has been
limited compared with large manufacturers. As for
nonmanufacturers, current profits of large firms
have registered a relatively significant decline.
This is due to a deficit in the electric and gas
utilities industry against the background of higher
fuel costs and to the fact that, after recording high
levels in the previous quarter, current profits for
industries such as wholesale decreased owing to

26
the decline in commodity prices. Current profits of
small and medium-sized nonmanufacturers have
Chart 18: Business Conditions
DI ("favorable" - "unfavorable"), % points
60
continued to register a slight decline due to
All industries
deterioration in the terms of trade. 40 Manufacturing
Nonmanufacturing
20

Business sentiment has been more or less 0

unchanged on the whole. According to the Tankan,
-20
the DI for business conditions for all industries "Favorable"

and enterprises improved slightly for the -40

"Unfavorable"
December survey, particularly for
-60
nonmanufacturing (Chart 18). By industry, despite CY 90 95 00 05 10 15 20
Source: Bank of Japan.
being affected by high raw material costs and Notes: 1. Based on the Tank an. All enterprises. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.
2. Shaded areas denote recession periods.
adjustment pressure on IT-related goods, the DI
for manufacturing has been more or less flat,
mainly due to the waning of the effects of
supply-side constraints and to progress in the
pass-through of cost increases to selling prices.
The DIs for production machinery and electrical
machinery (large enterprises) have deteriorated
slightly, with stronger adjustment pressure on
semiconductor memory and other items, while
those for motor vehicles (large enterprises) and
other related industries have improved as the
tightness in global supply and demand conditions
for semiconductors used in automobiles has
eased gradually. In the meantime, continued high
raw material costs have pushed down the DIs for
chemicals and other industries, while progress in
the pass-through of cost increases has pushed up
the DIs for industries such as those of food and
beverages and of processed metals. The DI for
nonmanufacturing has continued to improve as
the resumption of economic activity has
progressed while public health has been
protected and as cost increases have been
passed on to selling prices. The DIs for private
consumption-related industries such as those of
accommodations as well as eating and drinking

27
services and of retail have improved due to the
Chart 19: Coincident Indicators of
increase in private consumption boosted by the Business Fixed Investment
government's domestic travel discount program, 100
s.a., ann., tril. yen s.a., CY 2015=100
160
Private nonresidential investment
as well as to a hike in selling prices. However, the (SNA, real, left scale)
Domestic shipments and imports of
150
95
capital goods (right scale)
DI for future business conditions for Private construction completed 140
90 (nonresidential, real, right scale)
manufacturing has deteriorated, due to concern 130
120
over slowdowns in overseas economies, while 85
110
that for nonmanufacturing has deteriorated as 80
100
well, due to concern over high prices and the
75 90
impact of the spread of COVID-19. Meanwhile, 80
according to various surveys, business sentiment 70
70
for small and medium-sized firms, including 65 60
CY 07 09 11 13 15 17 19 21
smaller ones that are not covered by the Tankan, Sources: Cabinet Office; Ministry of Economy, Trade and Industry; Ministry of Land,
Infrastructure, Transport and Tourism.
has been more or less flat. This is because, Notes: 1. The figure for domestic shipments and imports of capital goods for 2022/Q4 is
the October-November average. The figure for private construction completed
for 2022/Q4 is that for October.
although such sentiment has continued to be 2. Figures for real private construction completed are based on staff calculations
using the construction cost deflators.

pushed down by high costs, it has been

underpinned by factors such as a pick-up in
domestic demand.

Regarding the outlook for corporate profits, they

are expected to be at high levels on the whole for
the time being, partly due to a recovery in Japan's
economy, although they are likely to be affected
by cost increases resulting mainly from high
commodity prices and by the slowdowns in
overseas economies. Thereafter, as the effects of
deterioration in the terms of trade stemming from
the rise in commodity prices wane gradually,
corporate profits are projected to improve,
reflecting a recovery in the level of economic
activity.

Business Fixed Investment

Business fixed investment has increased

moderately (Chart 19). With the effects of
supply-side constraints waning, the aggregate
supply of capital goods -- a coincident indicator of

28
machinery investment -- has increased, albeit with
Chart 20: Leading Indicators of Business
fluctuations, mainly led by digital- and labor Fixed Investment
saving-related investments. Private construction 13
s.a., ann., tril. yen
Machinery orders (private sector, excluding
completed (nonresidential) -- a coincident 12 volatile orders)

indicator of construction investment -- has Construction starts (private, nonresidential,

estimated construction costs)
11
increased moderately, mainly due to a rise in
10
construction of logistics facilities on the back of an
9
expansion in e-commerce and to progress in
8
urban redevelopment projects.
7

Machinery orders -- a leading indicator of 5

CY 07 09 11 13 15 17 19 21
machinery investment -- have increased, albeit Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Notes: 1. Volatile orders are orders for ships and orders from electric power companies.
with fluctuations (Chart 20). By industry, orders by 2. Figures for 2022/Q4 are October-November averages.

the manufacturing industry have been on an

uptrend on the whole, mainly led by
"general-purpose, production, and
business-oriented machinery," reflecting factors
such as projections that digital-related demand
will increase in the medium to long term, although
electrical machinery orders have seen a pause
against the backdrop of adjustment pressure on
semiconductor memory and other items. Orders
by the nonmanufacturing industry have been
more or less flat, supported by digital-related and
labor-saving investments. Construction starts (in
terms of planned expenses for private and
nonresidential construction) -- a leading indicator
of construction investment -- have increased,
albeit with fluctuations. This is due to an uptrend
in construction of logistics and other facilities and
to progress in urban redevelopment projects.
Looking at the business fixed investment plan in
the December Tankan, business fixed investment
(on the basis close to GDP definition; business
fixed investment -- including software and R&D
investments but excluding land purchasing
expenses -- for all industries and enterprises
including financial institutions) for fiscal 2022

29
shows a year-on-year rate of increase of 14.7
Chart 21: Planned and Actual Business
percent (Chart 21). As with the previous survey in Fixed Investment
y/y % chg.
September, plans for a significant increase in 20 Private nonresidential investment (SNA, nominal)

business fixed investment have been maintained 15 Tankan (actual)

Tankan (planned investment in current fiscal
for both the manufacturing and nonmanufacturing 10 year as of the December survey of each year)

industries. 5

-5
With regard to the outlook, as corporate profits
-10
remain at high levels on the whole, business fixed
-15
investment is expected to continue increasing,
-20
mainly on the back of accommodative financial FY 07 09 11 13 15 17 19 21
Sources: Bank of Japan; Cabinet Office.
conditions. Toward the end of the projection Notes: 1. The Tank an figures include software and R&D investments and exclude land
purchasing expenses. R&D investment is not included before the March 2017

period, business fixed investment is expected to survey. The figures are for all industries including financial institutions.
2. The figure for private nonresidential investment for fiscal 2022 is the 2022/Q2-
Q3 average.
continue increasing, partly due to an increase in
medium- to long-term investment, although the Chart 22: Capital Stock Cycles
pace of increase is projected to slow, reflecting 10
business fixed investment, y/y % chg.
Investment-
cyclical adjustment pressure stemming from the 05 capital stock
ratio at the
end of FY
accumulation of capital stock (Chart 22). 5 11 04
15 2021
03 13 14 17
Specifically, investment that is projected to be 10 18
1.5%
12 21 16
undertaken during the projection period includes 0
07 06 19
FY 2022 1%
(1) investment induced by the increase in
-5 08
domestic and external demand, (2) IT-related 20
0.5%

investment to address labor shortage and

-10 09 0%
digitalize business activities, (3) construction Expected
growth rate: -2% -1%
investment in logistics facilities, resulting from the -15
9.5 10.0 10.5 11.0 11.5 12.0 12.5 13.0
expanding e-commerce, and in offices and investment-capital stock ratio at the end of the previous fiscal year, %
Source: Cabinet Office.
commercial facilities due to redevelopment Note: Each broken line represents the combination of the rate of change in business fixed
investment and the investment-capital stock ratio at a certain expected growth rate. The
figure for fiscal 2022 is the 2022/Q2-Q3 average.
projects, (4) investment for growth areas and to
address environmental issues, such as toward
decarbonization, and (5) semiconductor-related
investment that is mainly aimed at strengthening
supply chains and that also reflects government
support.

Employment and Income Situation

The employment and income situation has

improved moderately on the whole.

30
Regarding the number of employed persons, that
Chart 23: Number of Employed Persons
of regular employees has followed a moderate s.a., mil. persons s.a., CY 2019=100
68 105
uptrend, mainly in the medical, healthcare, and
welfare services industry as well as the 67 100
information and communications industry, both of 66
95
which have faced a severe labor shortage (Chart
65
23). When fluctuations are smoothed out, the 90
64
number of non-regular employees has also
85
followed a moderate uptrend, mainly in the 63

face-to-face services industry and the medical, Employed persons (left scale)
80
62 Regular employees (right scale)
healthcare, and welfare services industry. Total Non-regular employees (right scale)
61 75
hours worked per employee have been more or CY 07 09 11 13 15 17 19 21
Source: Ministry of Internal Affairs and Communications.
less flat, when fluctuations due to the number of Note: Figures for regular employees and non-regular employees prior to 2013 are based
on the "detailed tabulation" in the Labour Force Survey. Figures for 2022/Q4 are
October-November averages.
weekdays are smoothed out. With regard to labor
market conditions, the unemployment rate has Chart 24: Unemployment Rate and Labor
been at around 2.5 percent (Chart 24). 9 The Force Participation Rate
s.a., % s.a., %
7 63
active job openings-to-applicants ratio has risen Unemployment rate (left scale)
moderately, as the number of job offerings for Labor force participation rate
6 (right scale) 62
regular employees has been firm in industries
with labor shortage and as that for part-time 5 61
employees has increased, including in the
face-to-face services industry (Chart 25). 4 60

Meanwhile, the labor force participation rate has

been on a moderate uptrend, particularly for 3 59

women, when fluctuations are smoothed out

2 58
(Chart 24). CY 07 09 11 13 15 17 19 21
Source: Ministry of Internal Affairs and Communications.

Chart 25: Job Openings-to-Applicants

With regard to the outlook for the number of Ratio
s.a., ratio
employees, regular employees are likely to 2.6
Active job openings-to-
continue increasing, mainly in industries with applicants ratio
2.2
New job openings-to-
labor shortage, such as medical, healthcare, and applicants ratio

welfare services, information and communications, 1.8

and construction. Non-regular employees, such

1.4
as in the face-to-face services industry, are also
likely to continue increasing as the impact of 1.0

0.6
9
Box 2 outlines the current situation and outlook for labor market
conditions. 0.2
CY 07 09 11 13 15 17 19 21
Source: Ministry of Health, Labour and Welfare.

31
COVID-19 wanes. Toward the end of the
projection period, however, with the economic Chart 26: Nominal Wages
y/y % chg.
3
growth rate slowing, the pace of increase in the Special cash earnings (bonuses, etc.)
Non-scheduled cash earnings
number of employees is projected to decelerate, Scheduled cash earnings
2 Total cash earnings
partly because it will become more difficult for
labor supply to increase, reflecting factors such as 1
demographic changes. Under these
circumstances, the unemployment rate is 0

expected to follow a moderate declining trend on

-1
the back of a recovery in economic activity.

-2
12/Q1 14/Q1 16/Q1 18/Q1 20/Q1 22/Q1
Source: Ministry of Health, Labour and Welfare.
Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November,
On the wage side, total cash earnings per Q4 = December-February.
2. Figures from 2016/Q1 onward are based on continuing observations following

employee have increased moderately, reflecting a the sample revisions.

pick-up in overall economic activity (Chart 26).10

The year-on-year rate of change in scheduled
Chart 27: Decomposition of Developments
in Scheduled Cash Earnings
cash earnings has continued to increase 2
y/y % chg.
Contribution of the share of part-time employees, etc.
moderately (Chart 27). Looking at the breakdown, Contribution of part-time employees
Contribution of full-time employees
that for full-time employees has been in the range Scheduled cash earnings
1
of 1.0-1.5 percent, with concern over labor
shortage continuing. The year-on-year rate of
0
change in hourly scheduled cash earnings for
part-time employees has risen to around 2
-1
percent recently, as labor market conditions have
tightened and minimum wages have been
-2
raised. 11 Non-scheduled cash earnings have
12/Q1 14/Q1 16/Q1 18/Q1 20/Q1 22/Q1
increased in reflection of improvement in Source: Ministry of Health, Labour and Welfare.
Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November,
Q4 = December-February.
economic activity, and their year-on-year rate of 2. Figures from 2016/Q1 onward are based on continuing observations following
the sample revisions.

change has registered a relatively large positive

figure. Special cash earnings (bonuses) have

10
Wages in the Monthly Labour Survey are assessed on the basis
of continuing observations, which are less susceptible to
fluctuations due to sample revisions.
11
It has been difficult to capture the trend of the year-on-year rate
of change in hourly scheduled cash earnings for part-time
employees from the Monthly Labour Survey, due to the effects of
employment adjustment subsidies. In this regard, the year-on-year
rate of change in part-time wages at the time of recruitment has
recently accelerated to around 3 percent (for details, see Box 3).

32
continued on an uptrend, reflecting high levels of
Chart 28: Employee Income
corporate profits. y/y % chg.
4

2
With regard to the outlook for wages, scheduled
cash earnings are expected to continue
0
increasing as there are likely to be higher wage
increases resulting from labor-management wage Total cash earnings
-2
Number of employees
negotiations, mainly on the back of a tightening of Employee income
labor market conditions and price rises.12 Despite Real employee income
-4
the declining trend in non-scheduled hours 12/Q1 14/Q1 16/Q1 18/Q1 20/Q1 22/Q1
Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and

worked, mainly brought about by progress with Communications.

Notes: 1. Q1 = March-May, Q2 = June-August, Q3 = September-November,
Q4 = December-February.
working-style reforms, non-scheduled cash 2. Employee income = Total cash earnings (Monthly Labour Survey) × Number
of employees (Labour Force Survey)
3. Figures from 2016/Q1 onward are based on continuing observations following
earnings are likely to increase moderately, the sample revisions of the Monthly Labour Survey.
4. Figures for real employee income are based on staff calculations using the CPI

reflecting improvement in economic activity.

(less imputed rent).

Special cash earnings (bonuses) are likely to

increase, with corporate profits following an
improving trend.13 Taking all of these factors into
account, the rate of increase in total cash
earnings per employee is projected to accelerate.

In light of the aforementioned employment and

wage conditions, employee income has improved
in nominal terms, but in real terms, its
year-on-year rate of decline has accelerated,
reflecting price rises (Chart 28). With regard to the
outlook, nominal employee income is likely to
continue increasing along with economic
improvement. In real terms, the year-on-year rate
of change in employee income is projected to be
negative toward the middle of the projection
period, reflecting price rises. Thereafter, however,

12
Box 3 examines the outlook for wages in Japan, taking its labor
market structure into account.
13
Lump-sum payments in response to price rises, or the so-called
inflation allowances, are expected to be included in special cash
earnings in many cases for statistical purposes.

33
it is likely to turn to a moderate increase as wage Chart 29: Private Consumption
s.a., CY 2015=100
growth accelerates and inflation declines. 120

115

Household Spending
Private consumption has increased moderately,
despite being affected by COVID-19.
The Consumption Activity Index (CAI, travel
balance adjusted) -- which is calculated by
combining various sales and supply-side statistics
from the viewpoint of gauging
consumption activity in a comprehensive manner
-- turned out to be more or less flat for the
110
105
100
95
Consumption Activity Index (travel
balance adjusted, real)
90
Consumption of households
85 excluding imputed rent (SNA, real)
Disposable income, etc. (SNA, real)
80
CY 12 13 14 15 16 17 18 19 20 21 22
Sources: Bank of Japan; Cabinet Office, etc.
Notes: 1. Figures for the Consumption Activity Index (CAI) are based on staff
calculations. The CAI figures (travel balance adjusted) exclude inbound tourism
consumption and include outbound tourism consumption. The figure for
Japan's 2022/Q4 is the October-November average.
2. The figure for consumption of households excluding imputed rent for 2022/Q4 is
based on staff calculations using the Synthetic Consumption Index for October.
3. "Disposable income, etc." consists of disposable income and adjustment for the
change in pension entitlements (using annual and quarterly estimates). Real
values are obtained using the deflator of consumption of households.

July-September quarter of 2022, despite being Chart 30: Consumption Activity Index
(CAI, Real)
affected by the COVID-19 resurgence (Charts 29 115
s.a., 2017/Q1=100 s.a., 2017/Q1=100
105
and 30). 14 It then increased for the
110 100
October-November period relative to the
105 95
July-September quarter, mainly for services
100 90
consumption, as the resumption of consumption
95 85
activities has progressed while public health has
been protected, and as the government's 90 80

domestic travel discount program has made a 85 75

Nondurable
positive contribution. Based on various sources, 80 goods <40.5> 70
Durable goods <8.9>
Services <50.7>
such as high-frequency indicators, statistics 75 65
published by industry organizations, and CY 17 18 19 20 21 22 17 18 19 20 21 22
Sources: Bank of Japan, etc.
Notes: 1. Based on staff calculations. Figures in angular brackets show the weights in the
anecdotal information from firms, it seems that CAI. Figures for 2022/Q4 are October-November averages.
2. Nondurable goods include goods classified as semi-durable goods in the SNA.

private consumption subsequently has been on a Chart 31: Consumption Developments

moderate uptrend, although prices have kept Based on Credit Card Spending
chg. from baseline, %
rising and the number of confirmed new cases of 20

COVID-19 has followed an increasing trend 10

(Chart 31). 0

-10

-20

-30
Total
14
Regarding the CAI, see the Bank's research paper "Revision of
Retail
the Consumption Activity Index to Capture Recent Changes in -40
Services
Consumption Patterns" released in July 2021.
-50
CY 20 21 22
Source: Nowcast Inc./ JCB, Co., Ltd., "JCB Consumption NOW."
Notes: 1. Figures are from the reference series in JCB Consumption NOW, which take
changes in the number of consumers into account. Figures for the total and for
services exclude telecommunications and are based on staff calculations.
2. The baseline is the average for the corresponding half of the month for fiscal
34 2016 through fiscal 2018.
By type, albeit with fluctuations that mainly result
Chart 32: Consumption of Durable Goods
from weather conditions, consumption of durable s.a., ann., mil. units s.a., CY 2015=100
6 160
goods has picked up moderately, mainly due to
150
the waning of supply-side constraints (Chart 32).
140
Specifically, the number of new passenger car 5
130
registrations has picked up moderately, albeit with 120
fluctuations, as the tightness in global supply and 4 110

demand conditions for semiconductors used in 100

automobiles has eased gradually. Sales of 3

New passenger car registrations 90
(including small cars with engine
80
household electrical appliances declined for sizes up to 660cc, left scale)
Sales of household electrical 70
November, mainly for seasonal items such as air appliances (real, right scale)
2 60
conditioners, due to relatively higher CY 12 13 14 15 16 17 18 19 20 21 22
Sources: Japan Automobile Dealers Association; Japan Light Motor Vehicle and
temperatures than in normal years. Thereafter, Motorcycle Association; Ministry of Economy, Trade and Industry; Ministry of
Internal Affairs and Communications.
Note: Figures for real sales of household electrical appliances are based on staff
however, it seems that these sales have calculations using the retail sales index of machinery and equipment in the Current
Survey of Commerce and the price index of related items in the CPI.

increased slightly, partly due to temperature

Chart 33: Consumption of Services
declines. When fluctuations are smoothed out, s.a., CY 2015=100
140
consumption of nondurable goods has increased,
mainly for clothes, although some effects of high 120

prices have been seen for items such as 100

beverages and food.
80

60

Services consumption has increased, 40

Total number of overnight guests
underpinned by the government's domestic travel 20
(excluding inbound visitors)
Sales in the food services industry
discount program, as the resumption of
0
consumption activities has progressed while CY 12 13 14 15 16 17 18 19 20 21 22
Sources: Japan Tourism Agency; Japan Foodservice Association, "Market Trend Survey
public health has been protected (Charts 31, 33, of the Food Services Industry."

and 34). Despite being affected by COVID-19, Chart 34: Mobility Trends in Downtown
Areas
dining-out -- including at izakaya (Japanese-style Jan. 2020=100, 7-day backward moving avg.
160
bars) -- has increased, mainly led by that of small CY 2023
CY 2022
140
groups. Domestic travel has increased not only CY 2020
CY 2019
120
for short but also long distances, partly due to the
positive contribution of the domestic travel 100

discount program. Meanwhile, overseas travel 80

has remained at a low level, although it has 60

continued to increase moderately. 40

20

0
Jan. 1 Mar. 1 May 1 July 1 Sept. 1 Nov. 1
Source: Agoop Corp.
Notes: 1. Figures are the sum of the differences in the number of visitors between 9 p.m.
and 4 a.m. on the following day in 53 downtown areas.
2. The latest figure is the average for January 9-15.

35
Looking at confidence indicators related to private
Chart 35: Confidence Indicators Related to
consumption, the Consumer Confidence Index Private Consumption
s.a.
has been on a deteriorating trend, particularly in 60

terms of consumer perception of "overall

50
livelihood," with attention being given to price
rises (Chart 35). The current economic conditions 40

DI (household activity-related) of the Economy

30
Watchers Survey -- which asks firms for their
views on the direction of the economy -- was 20 Improved

more or less flat for December 2022. This is Consumer Confidence Index
10
because, while a positive contribution to the DI Economy Watchers Survey
(household activity)
Worsened
was made by an increase in tourism demand that 0
CY 07 09 11 13 15 17 19 21
mainly reflects the easing of COVID-19 border Source: Cabinet Office.
Note: Figures for the Economy Watchers Survey are those for the current economic

controls and the domestic travel discount program, conditions DI.

there was concern over the impact of price rises

and the effects of the COVID-19 resurgence were
observed in part.

Regarding the outlook, although private

consumption is expected to be under downward
pressure from the real income side due to price
rises, it is projected to continue increasing. This is
mainly because pent-up demand is likely to
materialize, supported by household savings that
had accumulated as a result of pandemic-related
restrictions, as the resumption of consumption
activities progresses further while public health is
being protected. Private consumption is also likely
to be underpinned by the government's measures
to reduce the household burden of higher
gasoline prices, electricity charges, and
manufactured and piped gas charges, and by its
domestic travel discount program. Thereafter,
although the materialization of pent-up demand is
likely to be moderate in pace, private
consumption is expected to continue increasing
steadily as employee income keeps improving
and downward pressure stemming from high

36
prices wanes. The propensity to consume is likely
Chart 36: Average Propensity to Consume
to follow an uptrend with the impact of COVID-19 s.a., %
105
waning (Chart 36). It is expected to somewhat
exceed the average level seen prior to the 100
pandemic, partly due to the withdrawals of
95
household savings that had accumulated as a
result of pandemic-related restrictions. 90

85

Housing investment has been relatively weak, 80

mainly due to a rise in housing prices (Chart 37).

75
Specifically, the number of housing starts -- a CY 07 09 11 13 15 17 19 21
Source: Cabinet Office.
leading indicator of housing investment -- has Note: Average propensity to consume = Consumption of households / Disposable income, etc.
"Disposable income, etc." consists of disposable income and adjustment for the
change in pension entitlements (using annual and quarterly estimates).
been more or less flat on the whole, but that for
owned houses -- for which prices per house are
high -- has remained somewhat weak. Housing Chart 37: Housing Investment
s.a., ann., tril. yen s.a., ann., mil. units
28 1.4
investment is likely to remain relatively weak
Private residential investment
toward the middle of the projection period. This is 26 (SNA, real, left scale) 1.3
Housing starts
because, although accommodative financial 24 (right scale) 1.2

conditions are expected to provide support, the 1.1

22
rise in housing prices is projected to weigh on 1.0
housing investment. Thereafter, when fluctuations 20
0.9
are smoothed out, such investment is expected to 18
0.8
follow a moderate declining trend toward the end
16 0.7
of the projection period, reflecting demographic
14 0.6
developments. CY 07 09 11 13 15 17 19 21
Sources: Cabinet Office; Ministry of Land, Infrastructure, Transport and Tourism.
Note: The figure for 2022/Q4 is the October-November average.

37
II. Current Situation of Prices and Their
Outlook

Developments in Prices Chart 38: Inflation Indicators

y/y % chg.
Reflecting past developments in international 22/Q1 22/Q2 22/Q3 22/Q4
commodity prices and foreign exchange rate Consumer Price Index (CPI)
Less fresh food 0.6 2.1 2.7 3.6
developments, the quarter-on-quarter rate of Excluding temporary factors 2.1 2.6 3.1 3.9
change in the producer price index (PPI, adjusted Less fresh food and energy -0.9 0.9 1.5 2.7
Excluding temporary factors 0.7 1.3 1.9 2.9
for the effects of seasonal changes in electricity
Producer Price Index (q/q % chg.) 2.0 2.9 1.8 2.7
rates) has continued to be relatively high (Chart Services Producer Price Index 0.9 1.3 1.4 1.4
38). The year-on-year rate of increase in the GDP Deflator 0.4 -0.2 -0.3
Domestic demand deflator 2.6 2.8 3.2
services producer price index (SPPI, excluding
Sources: Ministry of Internal Affairs and Communications; Bank of Japan; Cabinet Office.
international transportation) has been in the range Notes: 1. Figures for the producer price index (PPI) are adjusted for the hike in electric
power charges during the summer season. Figures for the services producer
price index (SPPI) exclude international transportation.
of 1.0-1.5 percent, mainly on the back of a pick-up 2. The CPI figures excluding temporary factors are staff estimates and exclude
mobile phone charges and the effects of travel subsidy programs.
3. Figures for the CPI and the SPPI for 2022/Q4 are October-November averages.
in economic activity and a rise in personnel
expenses, with the impact of COVID-19 waning.
Chart 39: CPI (Less Fresh Food)
y/y % chg.
4.5
Mobile phone charges
4.0
Effects of travel subsidy programs
3.5
3.0 Effects of the consumption tax hike and
The year-on-year rate of change in the CPI (all free education policies
2.5 Energy
items less fresh food) has been in the range of 2.0 Excluding the above factors

3.5-4.0 percent due to rises in prices of such 1.5 CPI (less fresh food)
1.0
items as energy, food, and durable goods (Chart 0.5
39). The rate of increase in the CPI (all items less 0.0
-0.5
fresh food and energy, excluding temporary -1.0
factors such as the effects of the government's -1.5
-2.0
domestic travel discount program) has CY 17 18 19 20 21 22
Source: Ministry of Internal Affairs and Communications.
accelerated significantly, reflecting a pass-through Notes: 1. Figures for energy consist of those for petroleum products, electricity, and gas,
manufactured & piped.

to selling prices of increases in costs such as of 2. Figures for the "effects of the consumption tax hike and free education policies"
from April 2020 onward are staff estimates and include the effects of measures
such as free higher education introduced in April 2020.
raw materials (Chart 40).15
Chart 40: CPI (Excluding Temporary Factors)
y/y % chg.
3.5
Goods
3.0 General services (less housing rent)
Looking at the breakdown of developments in the
Housing rent (private and imputed rent)
year-on-year rate of change in the CPI (all items 2.5
Administered prices
CPI (less fresh food and energy)
less fresh food and energy, excluding temporary 2.0

1.5
15
The CPI figures excluding temporary factors are calculated by
1.0
excluding (1) the effects of the consumption tax hike and policies
concerning the provision of free education, (2) the effects of travel 0.5
subsidy programs, and (3) mobile phone charges from the CPI (all
items less fresh food) and the CPI (all items less fresh food and 0.0
energy), respectively.
-0.5
CY 17 18 19 20 21 22
Source: Ministry of Internal Affairs and Communications.
Notes: 1. Administered prices (less energy) consist of "public services" and "water
charges."
2. The CPI figures are staff estimates and exclude mobile phone charges and the
effects of the consumption tax hike, policies concerning the provision of free
38 education, and travel subsidy programs.
factors), the rate of increase in goods prices has
Chart 41: Various Measures of Core
continued to accelerate, and that in general Inflation
y/y % chg.
services prices has accelerated. The 3.0
Trimmed mean
year-on-year rate of change in administered 2.5
Weighted median
prices has been at around 0 percent. The rate of 2.0 Mode

increase in goods prices has continued to 1.5

accelerate as the pass-through of cost increases 1.0

to selling prices has intensified for a wide range of 0.5

items, especially food, daily necessities, and 0.0

durable goods. The rate of increase in general -0.5

services prices has accelerated against the -1.0

backdrop of an intensified pass-through of raw -1.5

CY 07 09 11 13 15 17 19 21
material costs, mainly for dining-out and Sources: Bank of Japan; Ministry of Internal Affairs and Communications.
Note: Based on staff calculations using the CPI excluding the effects of the consumption

housework-related services (e.g., services related

tax hikes, policies concerning the provision of free education, and travel subsidy
programs. The CPI figures from April 2020 onward are staff estimates and exclude
the effects of measures such as free higher education introduced in April 2020.
to housing repairs and maintenance). Although
water and sewerage charges for some local
governments have declined somewhat, the
year-on-year rate of change in administered
prices has been at around 0 percent in reflection
of a hike in fire and earthquake insurance
premiums.

The indicators for capturing the underlying trend

in the CPI have exhibited the following
developments (Chart 41).16 The trimmed mean of
the year-on-year rate of change in the CPI has
increased to around 3 percent due to price hikes
in a wide range of goods and services. Similarly,
the mode and the weighted median, which are

16
The trimmed mean is calculated by excluding items that belong
to a certain percentage of the upper and lower tails of the price
change distribution (10 percent of each tail) in order to eliminate
the effects of large relative price changes. The mode is the
inflation rate with the highest density in the price change
distribution. The weighted median is the average of the inflation
rates of the items at around the 50 percentile point of the
cumulative distribution in terms of weight. All three indicators are
calculated using data for each CPI item that excludes the effects
of the consumption tax hikes, policies concerning the provision of
free education, and travel subsidy programs.

39
less susceptible to developments in certain CPI
Chart 42: Diffusion Index of Price Changes
items, have risen. Looking at the year-on-year % points %
70 90
price changes across all CPI items (less fresh 60
Diffusion index (left scale)
Share of increasing items (right scale)
50 Share of decreasing items (right scale) 80
food), the share of price-increasing items minus 40
70
the share of price-decreasing items has continued 30
20 60
to increase in positive territory because costs 10
0 50
such as of raw materials have been passed on to -10
-20 40
a wide range of goods and services prices (Chart
-30
30
42). -40
-50 20
-60
-70 10
CY 07 09 11 13 15 17 19 21
Sources: Bank of Japan; Ministry of Internal Affairs and Communications .
Meanwhile, the year-on-year rate of change in the Note: The diffusion index is defined as the share of increasing items minus the share of
decreasing items. The share of increasing/decreasing items is the share of items
domestic demand deflator has been at around 3 for which price indices increased/decreased from a year earlier. Based on staff
calculations using the CPI (less fresh food) excluding the effects of the
consumption tax hikes, policies concerning the provision of free education, and
percent (Chart 38). By component, the private travel subsidy programs. The CPI figures from April 2020 onward are staff
estimates and exclude the effects of measures such as free higher education
introduced in April 2020.
consumption deflator has been in the range of
2.5-3.0 percent on a year-on-year basis, and
deflators such as for business fixed investment Chart 43: Inflation Rate and Output Gap
% y/y % chg.
8 4
have increased clearly, reflecting rises in material Output gap (left scale)
and other prices. On the other hand, the 6 3
CPI (less fresh food and energy,
year-on-year rate of change in the GDP deflator 4 right scale) 2

has been in the range of 0.0 to minus 0.5 percent, 2 1

pushed down by an increase in the import deflator 0 0
in reflection of developments in crude oil prices,
-2 -1
for example.
-4 -2

-6 -3

Environment Surrounding Prices -8 -4

CY 85 90 95 00 05 10 15 20
Sources: Ministry of Internal Affairs and Communications; Bank of Japan.
In the outlook for prices, the main factors that Notes: 1. The CPI figures are staff estimates and exclude mobile phone charges and the
effects of the consumption tax hikes, policies concerning the provision of free
education, and travel subsidy programs. The figure for 2022/Q4 is the October-
determine inflation rates are assessed as follows. November average.
2. Figures for the output gap are staff estimates.
First, the output gap is projected to turn positive
around the second half of fiscal 2022 with the
economy following a growth path that outpaces its
potential growth rate (Charts 2 and 43).
Thereafter, the output gap is likely to continue to
expand moderately.

Second, medium- to long-term inflation

expectations have risen, albeit at a moderate

40
pace relative to short-term ones. The December Chart 44: Output Prices
2022 Tankan shows that the output prices DI has DI ("rise" - "fall"), % points
50
increased (Chart 44). It also shows that firms' 40 Manufacturing
inflation outlook for general prices has been at a 30 Nonmanufacturing
high level, not only for the short term but also for 20
the medium to long term (Chart 45). Given that 10

the formation of inflation expectations in Japan is 0

-10
largely adaptive, an increase in actual inflation is
-20
expected to bring about a rise in households' and
-30
firms' medium- to long-term inflation expectations
-40
and, through changes in firms' price- and
-50
wage-setting behavior and in labor-management CY 74 78 82 86 90 94 98 02 06 10 14 18 22
Source: Bank of Japan.

wage negotiations, lead to a sustained rise in Note: Based on the Tank an. All enterprises. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.

prices accompanied by wage increases. Chart 45: Inflation Expectations

1. Survey
y/y, ann. avg., %
2.5
Market participants (QUICK, 2 to 10 years ahead)
Economists 1 (6 to 10 years ahead)
Third, the year-on-year rate of increase in import Economists 2 (7 to 11 years ahead)
Households (over the next 5 years)
2.0
Firms (5 years ahead)
prices has decelerated recently owing to price
declines in such items as crude oil that reflect 1.5
concern over a global economic slowdown, and to
a pause in the rapid depreciation of the yen (Chart 1.0

46[1]). Nevertheless, upward pressure of costs

led by past rises in import prices has continued to 0.5

be passed on to selling prices at the midstream to

0.0
downstream stages of supply chains, and this has CY 05 07 09 11 13 15 17 19 21 23
been a factor pushing up the CPI (Chart 46[2]). Sources: Bank of Japan; QUICK, "QUICK Monthly Market Survey <Bonds>";
JCER, "ESP Forecast"; Consensus Economics Inc., "Consensus Forecasts."
Notes: 1. "Economists 1" shows the forecasts of economists in the Consensus Forecasts.
Although the upward pressure on the CPI is "Economists 2" shows the forecasts of forecasters surveyed for the ESP Forecast.
2. Figures for households are from the Opinion Survey on the General Public's Views

expected to wane gradually, the pass-through of and Behavior, estimated using the modified Carlson-Parkin method for a 5-choice
question.
3. Figures for firms show the inflation outlook of enterprises for general prices
cost increases is projected to continue for a wide (all industries and enterprises, average) in the Tank an.

2. BEI
range of goods and services prices in the short %
2.5
run given, for example, that the degree of cost 2.0
increases in the recent past has been larger than 1.5
1.0
those in previous phases.
0.5
0.0
-0.5
-1.0
Meanwhile, energy prices (e.g., gasoline prices
-1.5 Old (10 years)
and electricity charges) are likely to fluctuate -2.0 Old (longest)
owing to developments in import prices, such as -2.5 New (10 years)
-3.0
for crude oil, as well as to the effects of the
-3.5
CY 05 07 09 11 13 15 17 19 21 23
Source: Bloomberg.
Note: The BEI (break-even inflation) rate is the yield spread between fixed-rate
coupon-bearing JGBs and inflation-indexed JGBs. Inflation-indexed JGBs
issued since October 2013 are designated as "new," while the rest are
designated as "old." Figures for "old (longest)" are calculated using yield
41 data for issue No. 16 of inflation-indexed JGBs, which matured in June 2018.
government's measures and of changes in
Chart 46: International Commodity Prices
regulated rates. Specifically, the year-on-year rate and FD-ID Price Indexes
of change in energy prices is projected to decline 1. International Commodity Prices
oil: $/bbl, copper: 100 $/t, monthly avg.
clearly for a while, since prices of petroleum 140
Crude oil (Dubai)
products have been curbed by the effects of the 120
Copper
government's gasoline subsidies and, at the end
100
of fiscal 2022, the government will implement the
80
measures to reduce the household burden of
higher electricity charges and of higher 60

manufactured and piped gas charges.17 From the 40

beginning of fiscal 2023, upward pressure will be
20
exerted on energy prices if the hikes in regulated
electricity rates that power companies are 0
CY 07 09 11 13 15 17 19 21 23
currently applying for are approved by the Sources: Nikkei Inc.; Bloomberg.

government. However, as the effects of the

2. FD-ID Price Indexes (All Commodities)
government's measures to respond to soaring CY 2015=100
170
energy prices are expected to outweigh such ID index (stage 1)
160
ID index (stage 2)
upward pressure, the year-on-year rate of change 150 ID index (stage 3)
in energy prices is likely to turn negative toward 140
ID index (stage 4)
FD index (excluding exports)
the middle of fiscal 2023. Thereafter, assuming 130
that the government's various measures will be 120

scaled back, the rate of change in energy prices is 110

100
highly likely to turn positive and accelerate clearly
90
through the first half of fiscal 2024, partly due to a
80
waning of the effects of the measures to respond
70
to soaring energy prices pushing down such CY 15 16 17 18 19 20 21 22
Source: Bank of Japan.
prices of the previous year.

17
With regard to gasoline subsidies, the government has
introduced a measure to provide subsidies to petroleum
distributors and importers as funds to contain a sharp rise in their
selling prices when the nationwide average for retail gasoline
prices exceeds the benchmark price (168 yen per liter). It has
decided to continue with this measure until the end of May 2023
while lowering the upper limit of the subsidies. The government
has announced that it will gradually scale back the gasoline
subsidies from June. With regard to electricity charges, through its
measures to reduce the household burden, electricity charges will
be cut by 7 yen per kilowatt-hour (roughly a 20 percent discount
per month for typical households) for the period from February
through September 2023 and by 3.5 yen per kilowatt-hour for
October. Regarding manufactured and piped gas charges, roughly
similar measures to reduce the household burden have been
introduced.

42
Outlook for Prices

Based on this underlying scenario, the

Chart 47: Phillips Curve
year-on-year rate of change in the CPI (all items CPI (less fresh food and energy), y/y % chg.
4
less fresh food and energy) is projected to 1983/Q1-2013/Q1
3 2013/Q2-2022/Q3
increase for the time being as the pass-through of
2022/Q4
cost increases led by a rise in import prices is 2 B

likely to continue for prices of items such as food,

1
A
durable goods, and dining-out. The rate of
0
increase is then expected to decelerate through
A:1983/Q1-2013/Q1
the second half of fiscal 2023 because the -1 y = 0.38x + 0.7
B:1983/Q1-1995/Q4
contribution of these factors to this CPI is likely to -2 y = 0.21x + 1.6
2013/Q2 C:1996/Q1-2013/Q1
C
wane. Thereafter, it is projected to accelerate y = 0.24x - 0.1
-3
again moderately on the back of continued -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6
output gap (2-quarter lead, %)
improvement in the output gap and rises in Sources: Ministry of Internal Affairs and Communications; Bank of Japan.
Notes: 1. The CPI figures are staff estimates and exclude mobile phone charges and the
effects of the consumption tax hikes, policies concerning the provision of free
medium- to long-term inflation expectations and in education, and travel subsidy programs. The figure for 2022/Q4 is the October-
November average.
2. Figures for the output gap are staff estimates.
wage growth (Chart 47).

On this basis, taking account of the

aforementioned developments in energy prices,
the year-on-year rate of increase in the CPI (all
items less fresh food) is likely to be relatively high
in the short run due to the effects of the
pass-through to consumer prices of cost
increases led by a rise in import prices. The rate
of increase is then expected to decelerate toward
the middle of fiscal 2023 because it is projected
that (1) the rate of change in energy prices will
turn negative and (2) there will be a gradual
waning of pressure on firms to pass on the cost
increases led by the rise in import prices.
Thereafter, the rate of increase in this CPI is
projected to accelerate again moderately on the
whole as (1) the rate of increase in energy prices
accelerates clearly and (2) the rate of increase in
the CPI (all items less fresh food and energy) also
accelerates moderately.

43
III. Financial Developments in Japan

Financial Conditions

Financial conditions have been accommodative

on the whole, although weakness in firms'
Chart 48: Yield Curves
%
2.0
financial positions has remained in some
1.8
segments. 1.6 Previous Outlook Report
(data as of October 27, 2022)
1.4 Latest (January 17, 2023)
1.2
1.0
Under QQE with Yield Curve Control, the shape 0.8
of the yield curve for Japanese government bonds 0.6
0.4
(JGBs) has been consistent with the current
0.2
guideline for market operations, in which the 0.0
short-term policy interest rate is set at minus 0.1 -0.2
-0.4
percent and the target level of 10-year JGB yields 0 1 2 3 4 5 6 7 8 9 10 15 20 30 40
years residual maturity
is around zero percent (Chart 48). At the Source: Bloomberg.

Monetary Policy Meeting held in December 2022,

the Bank decided to modify the conduct of yield Chart 49: Bank Lending Rates and Issuance
curve control, given that the functioning of bond Yields for CP and Corporate Bonds
%
2.0
markets had deteriorated, particularly in terms of
1.8 Bank lending rate (short-term)
relative relationships among interest rates of Bank lending rate (long-term)
1.6 CP (3-month)
bonds with different maturities and arbitrage Corporate bonds (AA)
1.4
relationships between spot and futures markets.
1.2
As part of the decision, while significantly 1.0
increasing the amount of JGB purchases, the 0.8
Bank expanded the range of 10-year JGB yield 0.6

fluctuations from the target level: from between 0.4

around plus and minus 0.25 percentage points to 0.2

0.0
between around plus and minus 0.5 percentage CY 05 07 09 11 13 15 17 19 21
Sources: Bank of Japan; Japan Securities Depository Center; Capital Eye;
points. I-N Information Systems; Bloomberg.
Notes: 1. Figures for issuance yields for CP up through September 2009 are the averages
for CP (3-month, rated a-1 or higher). Those from October 2009 onward are the
averages for CP (3-month, rated a-1).
2. Figures for issuance yields for corporate bonds are the averages for domestically
issued bonds launched on a particular date. Bonds issued by banks and securities
companies, etc. are excluded.
3. Figures for bank lending rates and issuance yields for corporate bonds are
Firms' funding costs have been hovering at 6-month backward moving averages.

extremely low levels (Chart 49). Issuance rates

for CP also have been at extremely low levels, as
issuance conditions have remained favorable.
The DI for issuance conditions for CP in the
Tankan has continued to show net "easy"
conditions, although the DI has declined due to an

44
increase in demand for working capital in
reflection of high commodity prices. In the
corporate bond market, while issuance conditions
Chart 50: Lending Attitudes of Financial
Institutions as Perceived by Firms
DI ("accommodative" - "severe"), % points
40

have remained favorable on the whole, issuance 30

spreads have widened and issuance rates have
20
risen. Meanwhile, lending rates (the average
interest rates on new loans and discounts) have 10

been at around historical low levels. 0

-10

Large enterprises
-20
The DI in the Tankan for financial institutions' Small enterprises

lending attitudes as perceived by firms suggests -30

CY 95 00 05 10 15 20
that such attitudes have remained Source: Bank of Japan.
Note: Based on the Tank an. All industries. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.
accommodative on the whole (Chart 50). The DI
for firms' financial positions in the Tankan Chart 51: Firms' Financial Positions
suggests that, although weakness has remained 1. By Firm Size
DI ("easy" - "tight"), % points
in some segments, the positions have continued 40
Large enterprises
on an improving trend, including for small firms, 30 Small enterprises
on the back of a pick-up in the economy (Chart
20
51). By industry, the DI for manufacturing has
10
deteriorated slightly, mainly due to the effects of
raw material cost increases, whereas that for 0

nonmanufacturing has remained on an improving -10

trend, mainly reflecting the effects of a pick-up in
-20
economic activity.
-30
CY 95 00 05 10 15 20
Source: Bank of Japan.
Note: Based on the Tank an. All industries. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.
Regarding firms' demand for funds, demand for
2. By Industry
working capital has increased in reflection of the DI ("easy" - "tight"), % points
30
pick-up in economic activity and raw material cost
Manufacturing
increases. In this situation, the aggregate amount 20 Nonmanufacturing

outstanding of CP and corporate bonds has

10
increased at a pace of around 4 percent on a
year-on-year basis (Chart 52). In addition, the 0

year-on-year rate of increase in the amount

-10
outstanding of bank lending has been at around 3
percent. -20

-30
CY 95 00 05 10 15 20
Source: Bank of Japan.
Note: Based on the Tank an. All enterprises. There is a discontinuity in the data for
December 2003 due to a change in the survey framework.

45
The year-on-year rate of change in the monetary
Chart 52: Amounts Outstanding of Bank
base has been slightly negative due to a decline Lending, CP, and Corporate Bonds
y/y % chg.
in the amount outstanding of funds provided 16
14
through the Special Funds-Supplying Operations Lending by domestic commercial banks
12 CP and corporate bonds
to Facilitate Financing in Response to the Novel 10
Coronavirus (COVID-19). The amount 8
6
outstanding of the monetary base was 632 trillion
4
yen, of which the ratio to nominal GDP was 114 2
18 0
percent. The year-on-year rate of change in the
-2
money stock (M2) has been at around 3 percent,
-4
mainly because fiscal spending has pushed it up -6
and the amount outstanding of bank lending has -8
CY 05 07 09 11 13 15 17 19 21
increased (Chart 53). Sources: Bank of Japan; Japan Securities Depository Center;
Japan Securities Dealers Association; I-N Information Systems.
Note: Figures for lending by domestic commercial banks are monthly averages.
Figures for CP and corporate bonds are those at the end of the period.

Chart 53: Money Stock

monthly avg., y/y % chg.
10
9
8 M2

7 M3

6
5
4
3
2
1
0
-1
CY 98 00 02 04 06 08 10 12 14 16 18 20 22
Source: Bank of Japan.

18
The amount outstanding of the monetary base is as of
end-December 2022. Nominal GDP is the figure for the
July-September quarter of 2022.

46
Developments in Financial Markets
Chart 54: 10-Year Government Bond Yields
In global financial markets, market sentiment has in Selected Advanced Economies
remained cautious, as market attention has 5 %
Japan
continued to be drawn to uncertainties
4 United States
surrounding monetary tightening by central banks Germany
in the United States and Europe and to a 3

slowdown in the global economy.

2

Yields on 10-year government bonds in the United

0
States have declined, mainly reflecting a
deceleration in its inflation rate (Chart 54). Those -1
CY 13 14 15 16 17 18 19 20 21 22 23
in Europe have risen, mainly in reflection of the Source: Bloomberg.

European Central Bank's communication to the Chart 55: Dollar Funding Premiums through
public indicating its firm stance toward containing Foreign Exchange Swaps
2.6 %
inflation. 2.4
2.2 Yen
2.0
Euro
1.8
1.6
Premiums for U.S. dollar funding through the 1.4
dollar/yen foreign exchange swap market 1.2
1.0
expanded temporarily due to a seasonal 0.8
tightening of supply and demand conditions for 0.6
0.4
this funding in view of the year-end (Chart 55). 0.2
0.0
Recently, as such tightening dissipated after the
-0.2
beginning of 2023, these premiums have CY13 14 15 16 17 18 19 20 21 22 23
Source: Bloomberg.
declined. Notes: 1. U.S. dollar funding premiums are calculated as the difference between U.S.
dollar fundings rates (3-month) in the dollar/yen or euro/dollar foreign exchange
swap market and those in the money market.
2. The interest rates used for the calculation are as follows: for the yen, the OIS
rate; for the euro, the EONIA-referencing OIS rate before October 4, 2019,
and the €STR-referencing OIS rate thereafter; for the U.S. dollar, the OIS rate
before January 3, 2019, and the SOFR thereafter.

Stock prices in the United States and Europe rose,

Chart 56: Selected Stock Price Indices
mainly reflecting a decline in U.S. long-term start of 2013=100
340
interest rates and diminished concern over the 320 Japan (Nikkei 225 Stock Average)

issue of energy supply in Europe this winter, and 300 United States (S&P500)
280
volatility in the market decreased (Charts 56 and 260
Europe (EURO STOXX)

Emerging markets (MSCI)

57). Stock prices in Japan rose along with those 240
220
in the United States and then declined, mainly 200
reflecting the yen's appreciation. Stock prices in 180
160
emerging economies have risen, particularly in 140
Asia, mainly due to market expectations for the 120
100
stimulus effects that China's policy shift from the
80
CY 13 14 15 16 17 18 19 20 21 22 23
Source: Bloomberg.
Note: Figures for emerging markets are those for the MSCI Emerging Markets Index
(local currency).

47
strict preventive measures against COVID-19 has
Chart 57: Stock Market Volatility (VIX)
on its economy. %
100
90
80
Prices of Japan real estate investment trusts 70
(J-REITs) have declined, mainly reflecting a rise in 60

long-term interest rates (Chart 58). 50

40
30
20
In foreign exchange markets, the yen has
10
appreciated against the U.S. dollar, mainly on the 0
back of a narrowing of the yield differential CY 13 14 15 16 17 18 19 20 21 22 23
Source: Bloomberg.
between Japan and the United States (Chart 59).
Meanwhile, the yen has also appreciated against Chart 58: Selected REIT Indices
start of 2013=100
the euro. 220
Japan (TSE REIT Index)
United States (S&P U.S. REIT Index)
200

180

160

140

120

100

80
CY 13 14 15 16 17 18 19 20 21 22 23
Source: Bloomberg.

Chart 59: U.S. Dollar/Yen and Euro/Yen

yen
160
U.S. dollar/yen
150
Euro/yen
140

130

120

110

100 Yen
depreciation
90 Yen
appreciation
80
CY 13 14 15 16 17 18 19 20 21 22 23
Source: Bloomberg.

48
 (Box 1) Recent Developments in Inbound Tourism Demand

The number of inbound visitors to Japan had

Chart B1-1: Number of Inbound Visitors to
been at an extremely low level since the outbreak Japan and Duty-Free Sales
s.a., ann., mil. persons s.a., ann., bil. yen
of COVID-19 but has turned to a clear increase, 50 800
Other (left scale)
given the government's relaxation of entry China (left scale)
40 Inbound visitors to Japan (left scale)
restrictions in October 2022 (Chart B1-1). In Department store duty-free sales (right scale) 600

addition, the expenditure per inbound visitor 30

seems to be at a high level, considering that sales 400
of duty-free goods at department stores have 20

recovered more rapidly than the number of 200

10
inbound visitors. Therefore, inbound visitors'
consumption in Japan (i.e., inbound tourism 0 0
CY 15 16 17 18 19 20 21 22
demand) has picked up, supported by the Sources: Japan National Tourism Organization (JNTO); Japan Department Stores
Association.
recovery in both the number of inbound visitors Note: Figures for 2022/Q4 are October-November averages.

and the expenditure per such visitor, and this has

boosted Japan's economic recovery. Chart B1-2: Number of Inbound Visitors to
Major Regions
same quarter in 2019=100
120

The outlook for inbound tourism demand is 100

United States
examined from the perspectives of the number of
80 EU
inbound visitors and the expenditure per such United Kingdom
60 Japan
visitor. First, the number of inbound visitors is
highly likely to follow a clear increasing trend for 40
the time being. In fact, in countries where
20
COVID-19 border controls were eased earlier
than in Japan, the number of inbound visitors has 0
CY 20 21 22
been on an uptrend. In the United States and Sources: CEIC; Japan National Tourism Organization (JNTO).
Note: The figure for the United States for 2022/Q4 is that for October. Figures for the EU
and Japan for 2022/Q4 are October-November averages. The figure for the United
Europe in particular, the number has already Kingdom for 2022/Q3 is the July-August average.

recovered to a level close to that seen prior to the

pandemic (Chart B1-2). However, the number of
Chinese tourists -- which accounted for around 30
percent of the number of inbound visitors to Japan
before the pandemic -- has remained at an
extremely low level, and thus future developments
warrant close monitoring. In addition, the pace of
recovery in overseas economies has slowed

49
recently, and this may affect the number of Chart B1-3: Exchange Rate and Inbound
inbound visitors to Japan. Visitor Spending
travel consumption per person, thous. yen
160

150 Yen Yen

depreciation appreciation
Second, there seems to have been a moderate
140
correlation between an increase in the
expenditure per inbound visitor and a 130

depreciation of the yen (Chart B1-3). The 120

expenditure per such visitor is likely to be at a
110
relatively high level for the time being, partly due
to the past depreciation of the yen. It is expected 100
70 80 90 100 110 120
that this, coupled with the rise in the number of nominal effective exchange rate, CY 2010=100
Sources: BIS; Japan Tourism Agency.
Note: The sample period is from 2010/Q2 to 2019/Q4. The broad-based nominal effective
inbound visitors, will lead to an increase in exchange rate is used.

inbound tourism demand.

50
 (Box 2) Current Situation and Outlook for Labor Market Conditions

Labor market conditions have been tightening in Chart B2-1: Various Measures of Labor
Market Conditions
Japan with economic activity continuing to CY 1990-2019 avg.=0, standard deviation
3
improve. Looking at various measures of labor Labor shortage
2
market conditions, some of them show that the
1
degree of tightness has been close to the
pre-pandemic level and to the peak during the 0

bubble period at the end of the 1980s (Chart -1

B2-1).19 -2
Active job openings-to-applicants ratio
-3 Employment conditions DI (Tankan)
Labor input gap
-4
The outlook for labor market conditions depends CY 80 85 90 95 00 05 10 15 20
on how much labor demand will rise, reflecting CY 1990-2019 avg.=0, standard deviation
2
improvement in economic activity, as well as on Labor shortage
1
developments in labor supply. In this regard,
looking at the 2010s, before the pandemic, while 0

labor demand increased along with an economic -1

recovery, the number of labor force participants
-2 Employment rate gap
rose on the labor supply side even amid a
Unemployment rate
decreasing total population because labor force -3 Short-term unemployment rate
Long-term unemployment rate
participation of seniors and women had advanced -4
(Chart B2-2). This eased upward pressure on CY 80 85 90 95 00 05 10 15 20
Sources: Ministry of Health, Labour and Welfare; Bank of Japan; Ministry of Internal
Affairs and Communications, etc.
wages stemming from tight labor market Notes: 1. Figures for each measure of labor market conditions are normalized by the
standard deviation from 1990 to 2019.
2. Figures for the active job openings-to-applicants ratio and the unemployment
conditions and supported economic growth. The rate for 2022/Q4 are October-November averages.
3. The labor input gap and the employment rate gap are staff estimates.
4. Figures for the short- and long-term unemployment rates up through 2001 are
following outlines whether an increase in labor on a semiannual or annual basis.

supply as seen in the 2010s can be expected

Chart B2-2: Labor Force Participants
going forward. 200
y/y chg., ten thous. persons
Men (aged 15-59)
Women (aged 15-59)
150 Seniors (aged 60-74)
Seniors (aged 75 and over)
First, the labor force participation rate for seniors, 100 Labor force participants
Total population
which had continued on an uptrend, has remained
50
more or less flat recently, partly reflecting moves
0
to temporarily put off participation in the labor
market due to the pandemic (Chart B2-3). The -50

-100
19
For details on each measure, see Box 1 in the July 2017 FY 05 08 11 14 17 20
Source: Ministry of Internal Affairs and Communications.
Outlook Report. Note: Figures for labor force participants are staff estimates adjusted for gaps due to
revisions of the benchmark population.

51
labor force participation rate for seniors aged 75 Chart B2-3: Labor Force Participation Rate
of Seniors
and over has been significantly lower than those s.a., % s.a., %
45 15
aged between 65 and 74, and the so-called baby
Aged 65-74 (left scale)
boomer generation (born between 1947 and 13
Aged 75 and over (right scale)
40
1949), which supported the increase in labor
supply in the 2010s, has reached their mid-70s. 11
35
Considering these factors, the pace of increase in
9
labor force participation of seniors is projected to
30
decelerate, as it is highly likely that the labor force 7
participation rate for the baby boomer generation
25 5
will decline (Chart B2-4). CY 07 09 11 13 15 17 19 21
Source: Ministry of Internal Affairs and Communications.
Note: Figures are staff estimates adjusted for gaps due to revisions of the benchmark
population. Figures for 2022/Q4 are October-November averages.

Second, room for additional labor supply seems Chart B2-4: Change in Population by Age
ann. chg., ten thous. persons
to have shrunk for women as well. Specifically, 60

although a so-called M-shaped curve -- which 40

20
indicates a low labor force participation rate for
0
women in their child-bearing and child-rearing
-20
phases -- had been observed in Japan, it has
-40
started to flatten in recent years (Chart B2-5). The
-60 Aged 75 and over
labor force participation rate for women in Japan -80 Aged 60-74

has been comparable to those in the United Aged 15-59

-100
Aged 15 and over
States and Europe, as seen in the rate for women -120
2010s 2020s
aged between 25 and 34 already exceeding those Sources: Ministry of Internal Affairs and Communications; National Institute of Population
and Social Security Research.
Note: Figures for the 2020s are calculated using forecasts for the period from 2020 to 2024.
in the United States and Germany and rising to a
level close to that in Sweden.
Chart B2-5: Labor Force Participation Rate
of Women (CY 2021)
%
100
Taking account of these factors, it is highly likely 90
80
that labor market conditions will tighten further as
70
labor demand is expected to rise due to an
60
economic recovery and as labor supply is unlikely 50 Japan (CY 2010)

to increase to the extent that it did in the 2010s. 40 Japan

United States
That said, uncertainties regarding this outlook, 30
Germany
20
both upside and downside, are high. Sweden
10
0
15-24 25-34 35-44 45-54 55-64 65-
age group
Source: OECD.
Specifically, labor demand is projected to be
affected by factors such as the pace of economic

52
recovery, which depends partly on the degree of
pent-up demand. On the labor supply side,
although the labor force participation rate for
women has risen to some extent, as mentioned
earlier, the total hours worked per female
employee have remained low compared with
those per male employee. Considering that labor
market reform has progressed and government
measures such as those to support employment
have been enhanced since the 2010s, there still
seems to be room for labor supply of women to
increase in the form of a rise in the number of
working hours. In addition, labor supply in such
industries as face-to-face services (e.g.,
accommodations as well as eating and drinking
services) is susceptible to whether the number of
foreign workers, for which the growth rate has
decreased since the outbreak of COVID-19, will
recover. It is necessary to pay close attention to
developments in labor supply, since it is an
important factor that affects wage developments.

53
 (Box 3) Dual Structure in the Labor Market and the Outlook for Wages

Wage growth in Japan has continued to be Chart B3-1: Scheduled Cash Earnings
y/y % chg.
sluggish since the second half of the 1990s. 4
Scheduled cash earnings
However, different developments between wages (full-time employees)
3 Average hourly wage for part-time jobs
of regular employees (full-time employees) and at time of recruitment
2
those of non-regular employees (part-time
employees) have been seen behind the overall 1
sluggishness: when labor market conditions
0
tightened notably in the second half of the 2010s,
growth in wages of part-time employees -1

accelerated, while that in full-time employees' -2

CY 08 10 12 14 16 18 20 22
scheduled cash earnings remained modest (Chart Sources: Ministry of Health, Labour and Welfare; Recruit Co., Ltd., "Report on Average
Hourly Wages for Part-Time Jobs at Time of Recruitment" (available only in
B3-1). Japanese).
Notes: 1. Figures for scheduled cash earnings from 2016/Q1 onward are based on
continuing observations following the sample revisions. Figures for the average
hourly wage for part-time jobs at the time of recruitment are for the three largest
metropolitan areas (the Tokyo metropolitan, Tokai, and Kansai areas).
2. Figures for 2022/Q4 are October-November averages.

This difference in wage developments between

regular and non-regular employees is mainly
attributable to (1) variance between the two in
terms of job mobility and the degree to which a
tightening of labor market conditions affects
wages, and (2) the fact that for regular employees,
both labor and management have tended to
prioritize employment stability over wage
increases, partly because of the experience of
severe employment adjustments in the past. 20
Taking this dual structure of the labor market into
account, it is projected in this Outlook Report that
wage growth will accelerate gradually, albeit at a
moderate pace.21

20
For the dual structure of Japan's labor market and its impact on
wages, see also Box 1 in the July 2018 Outlook Report.
21
At the Bank of Japan's workshop on "Issues Surrounding Price
Developments during the COVID-19 Pandemic" held in November
2022, wage developments and the link between wages and prices
in Japan were discussed, taking account of the characteristics of
Japan's labor market, such as its dual structure. For a summary of
the workshop, see the Bank's research paper "The Wage
Formation Mechanism in Japan: Summary of the Third Workshop
on 'Issues Surrounding Price Developments during the COVID-19
Pandemic,'" forthcoming in English.

54
Starting with wages of part-time employees, the Chart B3-2: Hourly Wage for Part-Time
Jobs at Time of Recruitment
growth rate is expected to accelerate clearly, 3-month central moving avg., yen
1,200
reflecting a tightening of labor market conditions.
In the face-to-face services industry -- such as
1,100
accommodations as well as eating and drinking
services -- where the resumption of economic
1,000
activity has started to become full-fledged, hourly
wages have seen a clear rise recently in reflection
900
of labor market conditions (Chart B3-2). All industries
Information and communications
Regarding the outlook, wages of part-time Wholesale and retail trade
Accommodations, eating & drinking services
800
employees are likely to increase to a greater CY 15 16 17 18 19 20 21 22
Source: HRog Co., Ltd.
extent than before, since labor market conditions Note: Figures are calculated using hourly wages for part-time jobs at the time of
recruitment, posted on major private job-search services. Job offers paying 3,000
yen an hour or more are excluded.
are expected to tighten from both the demand and
supply sides and hence labor shortages are Chart B3-3: "Reservation Wages"
projected to intensify, as pointed out in Box 2. On 110
CY 2018=100

this point, a survey suggests that the "reservation

Hourly wage non-workers
wage" of non-workers has risen recently, partly would receive if they worked
105
due to the effects of an increase in minimum
wages (Chart B3-3).22
100

95
Such upward pressure on wages against the
backdrop of the tightening of labor market
90
conditions has spilled over to scheduled cash CY 07 09 11 13 15 17 19 21
Source: Osaka University's Global COE Program, "Japan Household Panel Survey on
Consumer Preferences and Satisfaction."
earnings of some full-time employees. Specifically, Note: Figures are staff estimates using data from the survey by Osaka University and
trimming the data at the 3rd and 97th percentiles.
signs of change reflecting recent labor market
conditions and other factors have been seen in Chart B3-4: Scheduled Cash Earnings of
Full-Time Employees
wages in segments where the job mobility of 2.4
contribution to y/y chg., %

full-time employees is considered to be relatively 1. Industries in which wages are sensitive

to labor market conditions <22.1>
high, such as in certain industries including 1.8 2. Industries in which wages are not very sensitive
to labor market conditions <62.1>
face-to-face services, at small and medium-sized 3. Industries in which wages are determined
1.2 by the fee system <15.8>
firms, and among younger employees. Total

0.6

22 0.0
The reservation wage is the wage level above which
non-workers would accept a job and below which they would not.
For Chart B3-3, non-workers' answers to the following question in -0.6
Osaka University's Japan Household Panel Survey on Consumer CY 13 14 15 16 17 18 19 20 21 22
Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and
Preferences and Satisfaction are used as a proxy variable for the Communications.
Note: Group 3 comprises the medical, health care, and welfare services industries. Group
reservation wage: "If you were working, what do you estimate you 1 consists of industries in which wages are highly correlated with the unemployment
rate (industries for which the correlation coefficient for the period from 2016 to 2019
would be making per hour?" is minus 0.25 or smaller). Group 2 comprises all other industries. Figures are
estimated adjusting for the impact of sample replacement. The figures in angular
brackets show the shares in the total number of full-time employees in 2021.

55
First, developments by industry are examined. Chart B3-5: Sensitivity of Wages to Labor
Shortages by Firm Size
Year-on-year changes in scheduled cash sensitivity
1.2
earnings of full-time employees are divided into
Wage increase due
those in (1) industries in which wages are 1.0
** to labor shortage **
relatively sensitive to macro-level labor market 0.8
conditions, (2) industries in which wages are not
0.6
very sensitive to macro-level labor market
conditions, and (3) industries in which wages tend 0.4

to be determined by the fee system (medical,

health care, and welfare services industries)
(Chart B3-4).23 The results show that wages in
industries that are sensitive to labor market
conditions, such as face-to-face services, have
seen a relatively significant increase recently.
0.2
0.0
Total Large SMEs
enterprises
Sources: Ministry of Health, Labour and Welfare; Bank of Japan; Ministry of Internal
Affairs and Communications.
Note: The dependent variable is the year-on-year rate of change in scheduled cash
earnings of full-time employees in the Basic Survey on Wage Structure. Explanatory
variables include the following: a dummy for firms reporting "insufficient
employment" in the Tank an; inflation expectations (five years ahead), also from the
Tank an; the rate of change in the CPI (all items less fresh food, excluding the
effects of the consumption tax hikes, etc.) in the previous year; and real labor
productivity growth. The estimation period is from fiscal 2014 to 2021. The bars
marked with ** show that the results are statistically significant at the 5 percent
level, while the broken line means that the result is not statistically significant.

Next, the impact of labor market conditions on

wages is examined by firm size. Matching Chart B3-6: Wages at Large Enterprises
1. Wage Profile 2. Share of Job Offers
microdata from the Tankan and the Basic Survey Paying Higher Wage
thous. yen/month % s.a., %
on Wage Structure, released by the Ministry of 800 30 16
Change (right scale)
Health, Labour and Welfare, and looking at the 2015 (left scale) 14
700 20
relationship between each firm's assessment of 2021 (left scale) 12
600 10
employment conditions and its rate of change in 10

wages shows that for large firms, labor market 500 0 8

conditions have had no statistically significant 6

400 -10
impact on wages, while for small and 4
300 -20
medium-sized firms, a tightening of labor market 2

200 -30 0
20- 30- 40- 50- 60- CY 16 17 18 19 20 21 22
24 34 44 54 64
age group
Sources: Ministry of Health, Labour and Welfare; HRog Co., Ltd.
23
The analysis is conducted as follows. First, after adjusting for Notes: 1. In the left-hand chart, figures are calculated using the scheduled cash earnings
of regular employees with an undergraduate or graduate degree working for a
gaps resulting from sample revisions in the Monthly Labour private enterprise with 1,000 or more employees.
2. In the right-hand chart, figures are the share of job offers for regular employees
Survey, industries in which wages are closely linked to medical posted on major private job-search services paying a higher wage than in the
previous year. Job offers are examined by establishment, job type, etc.
and nursing care fees, such as hospitals and nursing care services,
are selected. All other industries are then divided into two groups
based on the degree of sensitivity to macro-level labor market
conditions. Namely, industries in which the correlation coefficient
between the unemployment rate and industry-level scheduled
cash earnings is greater than minus 0.25 are regarded as
"industries in which wages are not very sensitive to labor market
conditions" (e.g., manufacturing), and industries in which the
correlation coefficient is minus 0.25 or smaller are regarded as
"industries in which wages are sensitive to labor market
conditions" (e.g., face-to-face services).

56
conditions has tended to push up wages (Chart
Chart B3-7: Prices and Wage Negotiations
B3-5). y/y % chg.
7
Actual base pay increase
6 CPI inflation
5 Base pay increase demanded by labor unions

Furthermore, the wage profile by age has 4

flattened in recent years. Even at large firms, 3
wages of younger employees, for which there is a 2

large labor shortage and whose job mobility is 1

considered to be relatively high, have risen, albeit 0

-1
slightly. In terms of offered wages in the market
-2
where regular employees search for a new job, CY 91 94 97 00 03 06 09 12 15 18 21
Sources: Japanese Trade Union Confederation (Rengo); Central Labour Relations
more firms have raised their wage levels in Commission; Ministry of Internal Affairs and Communications.
Notes: 1. Figures for CPI inflation are for all items less fresh food, excluding the effects of
the consumption tax hikes, etc. The figure for 2022 is the January-November
response to the growing labor shortage (Chart average.
2. Figures for actual base pay increase from 1991 to 2013 are those published by
the Central Labour Relations Commission, while those from 2014 to 2022 are
B3-6). figures released by Rengo. Figures for the base pay increase demanded by
labor unions before 2023 are calculated by subtracting seniority-related wage
increases from the total increase in wages demanded. The figure for 2023 is
from Rengo's policy for the spring 2023 wage negotiations.

Chart B3-8: Reasons for Wage Increase

Thus, moves toward raising wages have been
%
100
observed recently, even for regular employees.
Going forward, in order for wage increases to Rise in prices
80
become full-fledged from a macroeconomic Recruitment, retention, and raising motivation

perspective, a broad-based rise in wages is 60

Rise in minimum wages
needed, including for segments where job mobility
40 Rise in new graduates' starting salary and
is relatively low. non-regular employees' wages

20

On this point, wage increases, including base pay 0

Dec. 17 Dec. 18 Dec. 19 Dec. 20 Dec. 21 Dec. 22
Source: Japan Chamber of Commerce and Industry, "LOBO survey."
increases, demanded by labor unions for the Note: The chart shows the percentage of small and medium-sized firms that in the LOBO
survey cited each reason as one for increasing the scheduled cash earnings of
annual spring labor-management wage regular employees.

negotiations this year have become higher, and

the outcome of these negotiations warrants close
attention (Chart B3-7). A recent survey shows that
the number of firms pointing to price rises as a
reason for their wage increases has risen (Chart
B3-8). With labor market conditions tightening, as
examined in Box 2, it is necessary to pay close
attention to the extent to which recent price rises
will be reflected in wages through the
labor-management wage negotiations.

57