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I. Economic Activity and Prices

A. Economic Developments at Home and Abroad I will begin my speech by talking about recent economic developments abroad and at home. Currently, the global economy seems to have begun searching for a new normal in the postCOVID-19 era. In 2020, when the pandemic started, countries around the world experienced economic contraction.

From spring 2021, as vaccinations progressed, mainly in advanced economies, the global economy was on its way to recovery. Therefore, economic activities were almost restored to the 2020 levels or recovered to higher ones in 2021. This recovery trend has generally been maintained until now, although the pace has been slowing (Chart 1). As a by-product, the recent economic recovery has created high inflation on a global basis. Many central banks have taken monetary tightening measures, such as raising policy rates and scaling back quantitative easing, at an exceptional speed in order to contain high inflation. This is because at least a temporary dampening of domestic demand is judged to be necessary to contain high inflation. It is uncertain whether the process of inflation subsiding will bring about a soft landing, but overseas economies, mainly advanced economies, will likely see a slowdown due to this tightening.

I will now turn to developments in Japan's economy. Despite being affected by factors such as high commodity prices, the economy has picked up as the resumption of economic activity has progressed while public health has been protected from COVID-19. The face-to-face services industry, which had undergone a severe business environment, has shown signs of a clear recovery, due in part to the government's domestic travel subsidy programs and the easing of COVID-19 border controls, both of which started in October 2022 (Chart 2). Exports and industrial production have continued to increase as a trend as the effects of supply-side constraints have dissipated, although the effects of the slowdown in overseas economies have started to be observed in some exports and industrial production (Chart 3). Corporate profits have been at high levels on the whole; this is mainly because a resumption of economic activity and the yen's depreciation pushed up corporate profits of large firms, particularly those of manufacturing firms, although the past rise in raw material costs and the delay in production due to supply-side constraints, for example, pushed down corporate 2 profits (Chart 4).

In such a situation, business fixed investment has picked up. Looking at the business fixed investment plan in the September Tankan (Short-Term Economic Survey of Enterprises in Japan), business fixed investment for fiscal 2022 is expected to see high growth, marking a double-digit increase. Japan's economy is likely to recover moderately, with the impact of 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. Looking ahead, I want to point out three risks in particular. First is the resurgence of COVID19, mainly due to new variants. Second is geopolitical risks regarding the situation surrounding Ukraine, particularly the risk of a consequent rise in energy prices. Third is a risk of a slowdown in the global economy due to the current monetary tightening conducted by central banks. A close examination of the third risk is especially important in envisioning the economic situation in the post-COVID-19 era.