Toward Strengthening the Competitiveness andGrowth Potential of Japan's Economyp y

Speech at the Executive Member Meeting of the Policy Boardof Nippon Keidanren (Japan Business Federation) in Tokyoof Nippon Keidanren (Japan Business Federation) in Tokyo

February 28, 2013

Masaaki ShirakawaGovernor of the Bank of Japan

ContentsContents

IntroductionIntroduction

I. The Aim of Economic Policy

II The Need to Strengthen Competitiveness and Growth PotentialII. The Need to Strengthen Competitiveness and Growth Potential

III. Outline of the Course of Future Measures

IV Reg lator and Instit tional Reforms Corporate Go ernance ReformIV. Regulatory and Institutional Reforms, Corporate Governance Reform,

and Social Values

V Relationship with PricesV. Relationship with Prices

VI. The Will to Reform

VII Conduct of Monetary Policy by the Bank of JapanVII. Conduct of Monetary Policy by the Bank of Japan

Final Remarks

The Bank of Japan introduced the "price stability target" and set it at 2 percent,based on its recognition that efforts to strengthen the competitiveness

Chart 1

based on its recognition that efforts to strengthen the competitivenessand growth potential of Japan's economy will make progress.

The Bank recognizes that the inflation rate consistent with price stability on a

Introduction of the "Price Stability Target" (Jan. 2013)g p y

sustainable basis will rise as efforts by a wide range of entities toward strengthening competitiveness and growth potential of Japan's economy make progress Based on this recognition the Bank sets the price stability target at 2progress. Based on this recognition, the Bank sets the price stability target at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI).

Under the price stability target specified above, the Bank will pursue monetary easing and aim to achieve this target at the earliest possible time. Taking into g g p gconsideration that it will take considerable time before the effects of monetary policy permeate the economy, the Bank will ascertain whether there is any significant risk to the sustainability of economic growth including from thesignificant risk to the sustainability of economic growth, including from the accumulation of financial imbalances.

1

Chart 2 The key aim of macroeconomic policy is to raise real GDP in a sustainable manner.

Japan's Real GDP

CY 1990=100

130

135CY 1990 100

120

125

110

115

105

110

95

100 Real GDP Real GDP per capita Real GDP per working-age person

2

Notes: 1. Working-age person refers to those from 15 to 64 years old.2. Population figures for 2012 are extrapolated using the growth rates for 2011.

Sources: Cabinet Office; World Bank.

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12CY

When adjusting for the effects of the population decline, a different picture emerges from developments in real GDP following the Lehman shock.

Chart 3

Real GDP Real GDP per CapitaReal GDP

per Working-Age Person

106CY 2007=100

106CY 2007=100

106CY 2007=100

104

106

104

106

104

106

100

102

100

102

100

102

96

98

96

98

96

98

92

94

92

94

92

94

90

9

Japan UnitedStates

Euroarea

UnitedKingdom

90

9

Japan UnitedStates

Euroarea

UnitedKingdom

90

9

Japan UnitedStates

Euroarea

UnitedKingdom

3

Notes: 1. Figures are for 2012/Q4 calculated on the assumption that the average for 2007 is 100. 2. Population figures for 2012 are extrapolated using the growth rates for 2011. 3. Working-age person refers to those from 15 to 64 years old.

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

States area Kingdom States area Kingdom States area Kingdom

Chart 4

Profits from outward investment by Japanese firms have been increasing.

Amount Outstanding of Outward Investment Assetsand Income Balance Income Balance

tril yen tril yen tril yen25

600

700Foreign exchange reserves

Other investment

Portfolio investment

tril. yen tril. yen

Gross income received

(right scale)

25Others

Portfolio investment income

tril. yen

20

500

Portfolio investment

Direct investment

Income balance(right scale)

15

20 Direct investment incomeIncome balance

10

15

300

400

( g )

10

15 Gross income received

5

10

200

5

10

0

5

0

100

0

5

4Source: Bank of Japan.

00

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

0

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

Chart 5Japan's terms of trade have been deteriorating.

Changes in the Terms of Trade

170CY 2000=100

150

160

70

Export price index

Import price index

f d ( i /i i )

130

140Terms of trade (export prices/import prices)

100

110

120

80

90

100

60

70

80

5Note: Both export and import price indices are based on the GDP deflator.Source: Cabinet Office.

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

Chart 6 Real GNI depends on developments both in net income from the rest of the world and in trading gains/losses.

115

450

500real, CY 2000=100

net income from the rest

real, CY 2000=100

Figures for 2012/Q4 (CY 2000=100)

(1) Real GDP: 109

110

300

350

400

(1)

(2) of the world(1) Real GDP: 109(2) Real GDP+net income

from the rest of the world: 111(3) Real GDP+net income

from the rest of the world+ trading gains/losses: 105

105

200

250

300(3)

+ trading gains/losses: 105

tradinggains/losses

100100

150

950

50

00 01 02 03 04 05 06 07 08 09 10 11 12CYNet income from the rest of the world (left scale)(1) Real GDP (right scale)(2) Real GDP + net income from the rest of the world (right scale)(3) Real GDP + net income from the rest of the world + trading gains/losses (real GNI, right scale)

6

Note: Trading gains/losses are changes in real income (purchasing power), reflecting changes in the terms of trade (export prices / import prices).For example, when commodity price rises cause import prices to rise more than export prices, trading gains decline in reflection of deteriorated terms of trade.To be specific, the definition of trading gains/losses is "nominal net exports / weighted average of export and import deflators – real net exports."

Source: Cabinet Office.

Chart 7

Tightened demand-supply conditions resulting from economic improvementcause prices to rise not the other way aroundcause prices to rise, not the other way around.

Cross Correlation between CPI and Output Gap

104y/y, % % 1.0

time-difference correlation coefficient

6

8

10

2

3

4

0.8

0.9

.0

0

2

4

0

1

2

0 5

0.6

0.7

-4

-2

0

-1

0

0.3

0.4

0.5

Output gap leading CPI leading

-8

-6

-3

-2CPI (all items less fresh food, left scale)

Output gap (right scale) 0.1

0.2

Notes: 1. Figures for the CPI are adjusted to exclude the effects of the consumption tax introduction in 1989 (3 percent) and the consumption tax hike in 1997

-10-485 87 89 91 93 95 97 99 01 03 05 07 09 11

CY

0.0

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6quarters

7

(from 3 to 5 percent).2. The output gap is estimated by the Research and Statistics Department, Bank of Japan. 3. Shaded areas indicate recession periods.4. Figures for the cross correlation are calculated using data between 1990/Q1 and 2012/Q3.

Sources: Ministry of Internal Affairs and Communications; Cabinet Office, etc.

Chart 8 A considerable portion of the Japanese public is not simply looking for a situation in which prices rise alone.

80%

100%Comments of Households on the Price Rise

40%

60%

0%

20%

Jun 04 05 06 07 08 09 10 11 12Jun. 04 05 06 07 08 09 10 11 12Rather favorable Neither favorable nor unfavorable Rather unfavorable

79 2Self-employed,

Difference by Sex Difference by Age Difference by Job

85 8

84.0

F l

Male

85.5

87.1

40 - 59

20 - 39

86.3

86.2

79.2

Non-regularemployee

Regularemployee

Se e p oyed,agriculture, etc.

85.8

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

Female83.3

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

60 or older 85.0

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

Others

employee

Notes: 1. Surveys were conducted in March, June, September, and December. Results of the questionnaires were obtained via the in-home survey method through June 2006,

8

Notes: 1. Surveys were conducted in March, June, September, and December. Results of the questionnaires were obtained via the in home survey method through June 2006, thereafter via the mail survey method.

2. Figures for differences by sex, by age and by job are newly calculated using raw data of the December 2012 survey.3. "Self-employed, agriculture, etc." includes agriculture, forestry, fisheries, self-employed, working for a family business, and professional worker. "Others" includes full-

time homemaker, student, unemployed, etc.Source: Bank of Japan.

Chart 9

Awareness of the situation surrounding income distributionhas increased around the globe.

Average Income and Median Income of U.S. Households

has increased around the globe.

125CY 2002=100

120

115

120

Average income

Median income

110

105

110

Median income

95

100

85

90

75

80

9

Notes: 1. Median income is household income that represents the middle of a series of all household incomes arranged in order of size.2. Figures for income are adjusted to exclude price fluctuations, transfers from the government to households, and taxes.

Source: Congressional Budget Office (CBO), "Trends in the Distribution of Household Income Between 1979 and 2007."

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07CY

Chart 10

A decline in the labor force population represents a considerably strong h d i d f i J 'headwind facing Japan's economy.

6avg., y/y % chg.

4

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

Rate of change in the number of workers

R l GDP h

3

4 Real GDP growth rate

Forecast

+0.9%

+0.8%1

2

+0.5%-0.2%

0 6%1

0

-0.6%-0.8%

-1.2%-2

-1

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

10

Note: The rates of change in the number of workers from 2013 onward are calculated using the projected future population (medium variant) and the projected labor force participation rates (assuming that the labor force participation rates in each age/sex group remain the same as those in 2012).

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

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

Chart 11Japan's labor productivity growth rate is comparable

with those for the G-7 countries.

Productivity Growth (Average after 2000)2.0

y/y % chg.

1.5

G-7 average after 2000: 0.9%

1.0

0.5

0.0

-0.5 Japan United Germany United France Italy Canada G7

Notes: 1. Productivity = GDP / number of employees.2. The productivity growth rate of the G-7 refers to the average of the seven countries.

Source: OECD.

p UStates

y UKingdom

y

11

Chart 12

A savings surplus by the corporate sector is a phenomenon now observed in other advanced countries as well

Savings Surplus of the Corporate Sector

12% of nominal GDP

a phenomenon now observed in other advanced countries as well.

8

10

JP: 4.6%US: 4 1%

UK: 6.1%

4

6

US: 4.1%

DE: 1.1%0

2

-4

-2

Japan United States

-8

-6

Japan United States

United Kingdom Germany

12Note: The corporate sector is calculated by removing two sectors -- general government and households -- from the domestic sector.Sources: Cabinet Office; BEA; Eurostat; ONS.

8

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

Chart 13 While their on-hand liquidity has increased,firms cannot muster enough confidence to invest at home.

ROA

90

100

1.4

1.5Business fixed investment / cash flow ratio

times %45210 Amount of cash equivalent

held by companies

tril. yen %12Japan United States

Germany France

%

70

80

90

1.2

1.3

. / cash flow ratio

Company savings / net operating surplus

35

40

190

200Proportion of firms withoutnet externalborrowings(right scale)8

10Germany France

50

60

1.0

1.1

30

35

180

190 (right scale)

6

20

30

40

0.7

0.8

0.9

25170

2

4

0

10

20

0.5

0.6

0.7

15

20

150

160

0

2

CY2000 2005 2010

Notes: 1. The ROA for each country is weighted by the market capitalization of sample firms (excluding financial institutions) which are composed of each index (TOPIX for Japan, S&P for the United States, DAX for Germany, and CAC40 for France).

2. Sample firms for the middle and right-hand graphs are of all industries excluding finance and insurance.3. Company savings/net operating surplus for up to 2000 refers 2000 base figures.

90 95 00 05 10FY 95 00 05 10CY-end

CY2000 2005 2010

13

p y g p g p p g4. Cash flow = depreciation expense + ordinary profit/25. Sample firms in the right-hand graph consist of 1,260 firms listed on the First or Second Section of the Tokyo Stock Exchange, with March year-ends, and for which

data can be obtained consecutively from fiscal 1995 onward (excluding financial institutions). Firms without net external borrowings are those for which cash, deposits, and cash equivalents exceed their interest-bearing debt. Cash equivalents are short-term assets such as CP, CD, and bond investment trusts.

Sources: Bloomberg; Ministry of Finance; Cabinet Office.

Chart 14

Expansion of Japanese firms' overseas business activities has spread to small and medium-sized enterprises

Number of Overseas Affiliates Number of Overseas Employees

to small and medium sized enterprises.

303.0

Small firms

Medium-sized firms

thous. thous.6000400

thous. thous.

252.5 Large firms (right scale)

5250350

202.0 4500300

151.5 3750250 Small firmsMedium-sized firms

101.0

FY06 07 08 09 10

3000200

FY06 07 08 09 10

Large firms (right scale)

14Source: Ministry of Economy, Trade and Industry.

Chart 15The outstanding amount of Japan's foreign direct investment remains at a low

level compared with that of other advanced countries.

Outward Direct and Portfolio Investment Position Japan's Rate of Returnon Outward Direct Investment (by Region)%

p

tril. dollars, as of end-2011

15

18%

ChinaAsia (excluding China)WorldNorth America8

10

12

Portfolio investment

Direct investment

tril. dollars, as of end 2011

12

North AmericaEU

4

6

8

9

0

2

4

6

% of nominal GDPDirect

UnitedStates

UnitedKingdom

Japan Germany France Italy Canada

0

3Directinvestment

42 133 57 67 85 59 18

Portfolioinvestment

36 70 17 46 51 36 31

T t l 78 203 74 113 136 95 49

15Note: Rates of return on outward direct investment are calculated by dividing the amount of total direct investment income by the direct investment position for the previous year-end.

Sources: OECD; IMF; Bank of Japan.

06 07 08 09 10 11CYTotal 78 203 74 113 136 95 49

Chart 16In terms of the profitability of foreign investment,

Japan falls somewhat behind the United States.

Rate of Return on Outward Investment(Direct and Portfolio Investment)

Rate of Return on Direct Investment Rate of Return on Portfolio Investment

Japan falls somewhat behind the United States.

(Direct and Portfolio Investment)

12%

12%

12%

8

10

8

10

8

10

4

6

4

6

4

6

2

4

2

4

2

4

0

Uni

ted

Stat

es

Can

ada

Japa

n

Uni

ted

ingd

om

erm

any

Fran

ce

Ital

y

0

Uni

ted

ingd

omU

nite

dSt

ates

Can

ada

Japa

n

erm

any

Ital

y

Fran

ce

0

Japa

n

Can

ada

Fran

ce

erm

any

Uni

ted

Stat

es

Ital

y

Uni

ted

ingd

om

16Note: Figures are for 2011. Rates of return are calculated by dividing the amount of total investment income by the investment position for the previous year-end.Source: IMF.

C U Ki

Ge U Ki C

Ge C

Ge U Ki

Chart 17

Huge potential demand in the area of building core infrastructure exists in Asia.

Share of Companiesin Infrastructure Order (CY2011)

Investment Demand on Infrastructure in Asia

Japanese5

tril. dollars

Japanese firms9%

South Korean firms4%Others

4Replacement

B kd

Total: about 8 trillion dollars

4%

U.S. or Canadian

firms

Others9%

3

demand

New demand

Breakdownof transportation

Chinese firms20%

13%2

European firms45%

1

45%0

Ene

rgy

Ele

ctri

city

)

nspo

rtat

ion

mun

icat

ions

ater

sup

ply

/hyg

iene

Roa

ds

Seap

orts

Rai

lway

s

Air

port

s

17Note: Figures for investment demand are the accumulated value from 2010 to 2020. Sample countries are 30 countries or regions located in the Asia-Pacific region.Sources: Ministry of Economy, Trade and Industry; Asian Development Bank.

(E

Tra

n

Com

m Wa /

Chart 18

The labor participation rate of the elderly has increased in recent years.

Labor Participation Rate of the ElderlyLife Expectancy of 60 Year-Olds

60

65%

28

30years

55

60

24

26

28Female

Male

45

50 60 to 64 years old

65 to 69 years old22

24

35

4018

20

30

35

05 06 07 08 09 10 11 12CY

14

16

1960 65 70 75 80 85 90 95 2000 05 10CY

18Sources: Ministry of Internal Affairs and Communications; Ministry of Health, Labour and Welfare.

Chart 19

The labor participation rate of women remains at a relatively low level compared with other advanced economies

Labor Participation of Women in 2010

compared with other advanced economies.

%

90

100

60

70

80

40

50

60

Sweden

Germany

20

30

40 United Kingdom

United States

Japan

0

10

20

19Sources: Ministry of Internal Affairs and Communications; OECD.

015-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 over 65

Age

Chart 20

Expenditure in medical and nursing care has increased at a pace lower than that of population aging in Japan.

Population Aging and Expenditure in Medical and Nursing Care

Japan GermanyUnitedStates

FranceUnited

Kingdom

Population aged 65 and over(Change from 2000 to 2009, percent)

29 24 13 9 9

Expenditure inmedical and nursing care

(Change from 2000 to 2009, percent)

17 31 82 98 49( g , p )

20Sources: United Nations; OECD.

Chart 21

The service sector, including medical and welfare industries,are offering increased employment opportunities

Employees of Service Industries Employees of Medical and Welfare Industries10 thous. 10 thous 10 thous. 10 thous.

are offering increased employment opportunities.

4500

4550

6450

650010 thous. 10 thous.

800

850

4500

4550Service industries

Medical, health care and welfare i d t i ( i ht l )

10 thous.

4400

4450

6350

6400

700

750

4400

4450

industries (right scale)

4350

4400

6300

6350

650

700

4350

4400

4250

4300

6200

6250

All industries550

600

4250

4300

4150

4200

6100

6150

All industries

Service industries (right scale)

450

500

4150

4200

21Note: Service industries include all industries other than the manufacturing, agriculture, forestry and fisheries, mining, and construction industries.Source: Ministry of Internal Affairs and Communications.

41506100

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

4504150

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

Chart 22

Japan's secondary housing market is smaller than other countries.

70010 thous.

500

600Second-hand dwellings transactions

502.2 (78.8%)400

500New housing starts

300

15.1 (12.4%)137.9 (85.5%)100

200

106.1 (87.6%) 135.5 (21.2%)

23.4 (14.5%)

( )

0

Japan United States United Kingdom

22

Notes: 1. Figures are for 2007. Those in parentheses represent each share.2. For the United Kingdom, the number of second-hand dwellings is derived by subtracting the number of new dwellings from the total

housing market.Sources: Ministry of Land, Infrastructure, Transport and Tourism; U.S. Census Bureau; U.K. Department for Communities and Local Government.

Japan United States United Kingdom

Chart 23

The share of residential assets among Japanese household assets tends to be high.

Breakdown of Household Assets

73.5Japan

27 2United

27.2States

66.6Euro area

0 20 40 60 80 100Currency and deposits Government and Corporate BondMutual fund Equity

d i f d h fi i l

%

Note: Figures are as of end-2010.Sources: Ministry of Internal Affairs and Communications; FRB; Eurostat. 23

Insurance and pension fund reserves Other financial assetsFixed assets

Chart 24

Compared with the United States, Japanese large-cap firms have longer corporate histories

Establishment Year of Top 300 Large-Cap Firms

have longer corporate histories.

number of firms

60

70number of firms

40

50United States

Japan

30

40

10

20

0

-1889 189099

190009

1019

2029

3039

4049

5059

6069

7079

8089

9099

200009

2010-CY

24

Note: Figures are based on the top 300 large-cap firms as of end-2012. Those for Japan for 2000 onward, however, exclude the establishment of stock-holding companies.Source: Thomson Reuters.

-99 -09 -19 -29 -39 -49 -59 -69 -79 -89 -99 -09

Looking at developments in the stock market after the Lehman shock,comparatively small firms have been performing relatively well.

Chart 25

Difference in Market Capitalization Developments by Size

p y p g y

Market capitalization declinedMarket capitalization increased

29.4 70.650 billion yen

or above(762)

5 billion yen or above and

(762)

44.9 55.1or above and

less than50 billion yen

(1,440)

58.7 41.3Less than

5 billion yen(1,153)

0 10 20 30 40 50 60 70 80 90 100

(1,153)

%Notes: 1. Sample firms are those that were listed on stock exchanges in Japan as of end-August 2008 and which remained so through January 2013.2. Figures are comparisons of market capitalization from August 2008 to January 2013.3. Firms are categorized based on their market capitalization as of end-August 2008.4. Figures in parentheses represent the number of firms that apply to each category.

Source: Bloomberg. 25

%

Japan has prioritized securing employment,reducing costs largely by cutting back wages

Chart 26

8y/y % chg.

12%

reducing costs largely by cutting back wages.

Hourly WagesUnemployment Rates

6

8

Japan United States10

12

Japan United States

48

26

04

-4

-2

0

2

85 87 89 91 93 95 97 99 01 03 05 07 09 11CY85 87 89 91 93 95 97 99 01 03 05 07 09 11CY

26Sources: Cabinet Office; Ministry of Internal Affairs and Communications; BLS.

Chart 27 As firms' profitability has been declining recently,neither wages nor prices have changed materially.

Developments in Corporate Profits, Wages, and Prices following Cyclic Peaks1986/Q4 ~ 90/Q41971/Q4 ~ 73/Q3

200latest peak=100

200Wages

latest peak=100

120

140

160

180 Wages

CPI

Corporate profits

120

140

160

180 Wages

CPI

Corporate profits

80

100

120

-15 -12 -9 -6 -3 0 3 6 9 12 15

80

100

120

-12 -9 -6 -3 0 3 6 9 12 15 18T hP k

180latest peak=100

140latest peak=100

2002/Q1 ~ 07/Q4 2009/Q1 ~

quartersTrough:71/Q4

Peak:70/Q3

quartersTrough:86/Q4

Peak:85/Q2

100

120

140

160 Wages

CPI

Corporate profits

60

80

100

120

Wages

CPI

60

80

100

-5 0 5 10 15 20 25

20

40

60

-12 -9 -6 -3 0 3 6 9 12 15 18

CPI

Corporate profits

5 0 5 10 15 20 25

quartersPeak:00/Q4

Trough:02/Q1

quartersTrough:09/Q1

Peak:08/Q1

27

Note: "Wages" refers to hourly cash earnings (monthly labour survey base, establishment with 30 or more employees, all industries). "CPI" refers to CPI for all items. "Corporate profits" refers to operating profit figures in "Financial Statements Statistics of Corporations by Industry, Quarterly" (all size, all industries).

Sources: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications; Ministry of Finance; Cabinet Office.

There is a clear positive correlation betweeninflation expectations and potential growth rates in Japan.

Chart 28

5

3

4y/y % chg. y/y % chg.

3

3

4 Potential growth rate (per capita, left scale)

y/y % chg. y/y % chg.Japan United States

3

4

1

2

3

2

1

2

3 Medium- to long-term inflation expectations(6 to 10 years ahead, right scale)

1

2

-1

0

1

0

1

-1

0

1

CY90 92 94 96 98 00 02 04 06 08 10 12CY90 92 94 96 98 00 02 04 06 08 10 12

54y/y % chg. y/y % chg.

54y/y % chg. y/y % chg.

United KingdomEuro Area

4

2

34

2

3

2

3

0

1

2

3

0

1

1-1CY90 92 94 96 98 00 02 04 06 08 10 12

1-1CY90 92 94 96 98 00 02 04 06 08 10 12Sources: Cabinet Office; Consensus Economics Inc., "Consensus Forecasts"; CBO; OECD, etc. 28

Changes in global investors' risk aversion significantly affect developments in financial markets.

Chart 29

Long Term Yield Spreads%

Beginning of 2011

July 24, 2012 Recent

Equity PricesLong-Term Yield Spreads

over German Government Bond YieldsBeginning of 2011

July 24, 2012 Recent

1.8 5.4 3.4

2.5 6.4 3.9

Italy

Spain

+3.6 -1.9

+3 9 2 5

10,398.1 8,488.1 11,254.0

11,670.8 12,617.3 13,900.1

Japan(Nikkei 225)

United States(Dow Jones)

-18.4% +32.6%

+8.1% +10.2%

9.6 26.8 9.7

Spain

Greece

+3.9 -2.5

+17.2 -17.1

2,839.4 2,151.5 2,570.5

100.0 85.3 95.4

Euro area(Euro STOXX)

Emergingeconomies

-24.2% +19.5%

-14.7% +11.9%

% chg., "+" means appreciation, "-" means depreciation

January 2011 → July 2012 July 2012 → January 2013

Equity Funds Inflows/OutflowsNominal Effective Exchange Rates

0 4

0.8 %

Yen + 6.3 - 13.9

U.S. dollar + 3.2 - 2.6

E 4 8 5 4 -0 4

0.0

0.4

Euro - 4.8 + 5.4

Pound sterling + 4.4 - 2.3

Korean won - 1.2 + 6.5 -1.2

-0.8

-0.4

Emerging economiesAdvanced economies

29

Notes: 1. Figures for equity prices for emerging economies are taken from the MSCI Emerging Markets Index, adjusted such that the figure for the beginning of 2011 is 100.2. Figures for "Equity Funds Inflows/Outflows" are calculated using each fund's net money flow data divided by its total assets.

Sources: Bloomberg; EPFR Global; BIS.

11 12 13CY

Exports and production increasedduring the mid-2000s when the yen depreciated.

Chart 30

110

120

120

140Real exports (left scale)Industrial production (right scale)

s.a., CY 2005=100s.a., CY 2005=100

80

90

100

80

100

p ( g )

60

70

40

60

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12CY

60Nominal effective exchange rate

CY 2005=100, reversed

80

100

Nominal effective exchange rateReal effective exchange rate

Yen'sdepreciation

120

140

160

depreciation

Yen'sappreciation

30Sources: Ministry of Economy, Trade and Industry; Bank of Japan; BIS.

16090 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13CY

The medium- to long-term growth rate has not risen.Chart 31

Foreign Exchange Rates, Exports, and Real GDP Growth

606y/y % chg. CY 2000=100, reversed

70

80

4

90

1000

2

100

110-2

0

Contribution to real GDP growth from net exports Yen's

120

130-4

Contribution to real GDP growth from domestic demand

Nominal effective exchange rate (right scale)

Yen s depreciation

Y '

Notes: 1. The nominal effective exchange rate is an indicator that measures the overall value of individual currencies. It is derived by calculating the weighted average of

140-6

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

Real effective exchange rate (right scale)

CY

Yen's appreciation

31

each currency's exchange rate against other currencies using the annual value of each country's trade with its counterparties as its weights.2. The real effective exchange rate is an indicator of a country's overall international competitiveness, calculated as follows. First, each of the exchange rates of the

country's currency against other currencies (i.e., nominal exchange rates) is deflated by the price indices of those countries to calculate the real exchange rate. Then, the weighted average of the real exchange rates is calculated using the annual value of each country's trade with its counterparties as its weights.

Sources: Cabinet Office; BIS.

Money is increasing.Chart 32

Relationship between Money and Prices200140

Real GDP CPIMoney stock Amount outstanding of lending

CY 2000=100 CY 2000=100

150

175

120

130 Monetary base (right scale)

125110

75

100

90

100

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

1

2

CPI (less fresh food)

y/y % chg.

-1

0

1 CPI (less fresh food)

32Sources: Cabinet Office, Ministry of Internal Affairs and Communications; Bank of Japan.

-2

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

The Bank of Japan has provided considerable funds through large-scale purchases of JGBs.Private financial institutions have been increasing their JGB holdings rather than lending

Chart 33

Private financial institutions have been increasing their JGB holdings rather than lending.

Deposit-Taking Financial InstitutionsAssets

Bank of JapanAssets Liabilities and Net Assets

1 600tril. yen

160tril. yen

160tril. yen

1,400

1,600

140

160

140

160

1,000

1,200

100

120

100

120

600

800

60

80

60

80

200

400

20

40

20

40

0

200

1998/12 2007/12 2012/9

0

20

1998/12 2007/12 2012/9

0

20

1998/12 2007/12 2012/9

33Note: Figures are as of end of month.Source: Bank of Japan.

LendingJGBsCurrent deposits at the BOJOthers

Banknotes Current deposits

Others

JGBs

Others

The Bank of Japan will supply additional funds amounting to over 60 trillion yen in the next two years.

Chart 34

Amount Outstanding of "Asset Purchase Program" and "Loan Support Program"

130

140tril. yen

110

120

130Loan Support Program (schedule)

Loan Support Program (actual)

h ( h d l )

80

90

100Asset Purchase Program (schedule)

Asset Purchase Program (actual)Aiming to achieve the price stability target, the Bank will continue a virtually zero interest rate policy

60

70

80 and purchases of financial assets as long as the Bank judges it appropriate to continue with each policy measure respectively.

30

40

50policy measure respectively.

For some time, the Bankwill purchase financial

10

20

30assets of about 13 trillion yen, 2 trillion yen of which is JGBs, every month.

34

0CY2010 2011 2012 2013 2014