 So we introduce the Foreign Minister. Let me welcome the Vice-Chancellor of the ANU, Professor Brian Schmidt. Thank you, Shiro, and thank you, ladies and gentlemen. Before we start, I'd like to acknowledge and celebrate the first Australians on whose traditional lands we meet today, pay our respects to the elders of the Noonawal people past, present, and emerging on this campus. Ambassador Aksaka, the former Ambassador and Chair of the Australian Japan Foundation, Barry McLean, friends, colleagues, and of course the Foreign Minister. We're delighted to be here today to welcome you all to the ANU and to the Japan Update, our flagship event on Japan each year. I am proud that we are able to host such important gathering each year that brings experts from the nation's university and indeed around the world. And we also have the ability to take this update around Australia. This year we'll be going to Perth as well after Melbourne and Sydney in the past two years. ANU has a long history of engagement with Japan and our Asian neighbors, joint research, close collaboration, and in shaping policies such as the work that led to the creation of APEC, and you'll see Peter Drysdale back there, and by educating the next generation of leaders in our region. We will continue to attract the best students and researchers because we invest in our Asian expertise. It is important for the nation and it's important for the National University to have this role. And as I said, we will continue to do this because it is one of our major strengths and our major contributions to the nation. ANU has the largest collection of Asian specialists in the English-speaking world, and we value that and value opportunities like this to communicate our research and the latest thinking to the public with our friends and colleagues from Japan. And so without further ado, I'm delighted to introduce the Honorable Julie Bishop, the Minister for Foreign Affairs and Deputy Leader of the Liberal Party. Minister Bishop is no stranger to ANU or Japan and it is fitting that she is here today to elevate what is already one of the highlights on our ANU calendar. So without further ado, Mr Bishop. I'm delighted to be here, the fifth annual Japan update with such a distinguished audience, and I acknowledge Japanese Ambassador Sumiyoko Saka, Vice-Chancellor Brian Schmidt, thank you for the introduction, and Chair of the Australia-Japan Foundation, Murray McLean, a great friend of Japan. I also make particular mention of Professor Peter Drysdale, who has done so much throughout his career to deepen our understanding of Japan and of the regional economy. Ladies and gentlemen, five years ago I addressed the first Japan update over dinner, which was attended by then Bank of Japan Governor Masaki Shirakawa, and it is fitting that Bank of Japan Chief Economist Toshitaka Sikin is here to address the audience today. The Japan update has become the peak academic gathering on Japan, and the event has increased in profile and relevance each time it's been held. And this gathering does represent ANU's deep expertise on Japan and the university's ability to draw the best thinkers on Japan from both our countries to deepen the level of collaboration. It also serves as an important forum to advance our appreciation for developments in the Japanese economy, Japanese society, politics and foreign relations. The discussions during the Japan update are important and deserve to be publicised and disseminated widely, and it is notable that the issue of the East Asia Foreign Quarterly is dedicated to Japan with themes and topics based on Japan update each year. Good foreign policy is never formulated in a vacuum. It is made better by the collective efforts of and debates amongst experts and commentators, including those who are here today. I'm particularly pleased that several of the speakers on the program will visit Western Australia and bring the update to my home city of Perth later this week. With our friend Ambassador Kasaka in attendance, I take the opportunity to acknowledge the important support that Prime Minister Shinzo Abe has given to the ANU in the study and understanding of Japan when he visited Canberra in 2014. Prime Minister Abe announced a million dollar program to support Australia Japan Research Centre, which is enhancing policy development and collaboration between the two countries. This is on top of the earlier investment that both governments and business communities made in the 1980s to establish the centre. One initiative of note is the collaborative effort between the centre and the Japanese government and academics to develop a HEX-style income contingent loan scheme in Japan. And I know Brian is particularly involved in that initiative. This is just one example of the policy innovation in education that is occurring between our two countries. Australia-Japan relations celebrate a significant milestone this year. 2017 marks the 60th anniversary of the Commerce Agreement between our two countries. The relatively simple title of Commerce Agreement doesn't do justice to its importance. What may appear today to be an uncontroversial event in the history of bilateral relations was anything but six decades ago. In 1957, the Commerce Agreement had fierce critics. The decision to normalise trade between our two countries took political and moral courage. The tumultuous events of the 1940s were still fresh in the minds of populations in both countries. However, the Australian government led by Sir Robert Menzies and the Japanese government led by Prime Minister Kishi were determined to look to the future and not to be constrained by the past. It was a visionary act that had an extraordinary impact on our nations. The agreement became the cornerstone of the strong bilateral partnership between our two countries. It formalised and entrenched the shift toward Japan as an important export market and source for manufactured imports. Rarely do acts of courage by political leaders pay such handsome dividends so soon after. Just one decade after its signing and economically rising Japan overtook the United Kingdom to become Australia's largest export market while Australians became accustomed and wanted cheaper and high quality Japanese goods. Japan remains one of our largest trading partners and is the fourth largest source for foreign direct investment into Australia. So the simply named commerce agreement was not just ahead of its time in a bilateral sense. Japan was then in the middle of pioneering the aptly named East Asian model of rapid economic development based on attracting foreign capital into one's economy, producing or else assembling exports cheaper, efficiently and more reliably than competitors and developing the know-how and the entrepreneurial spirit domestically in the process. Subsequently, South Korea, Taiwan, Singapore, Hong Kong, Malaysia, Thailand and the Philippines all adopted similar approaches. More recently China has learned and benefited enormously from Japan's experience. India, Indonesia and Myanmar are destined to do the same. Since the late 1950s we've witnessed the largest and most rapid alleviation of poverty in human history throughout our region. When we signed the 1957 agreement East Asia and Australia accounted for approximately 10% of global GDP. Our region now accounts for around 27% of global GDP and that could be as high as 40% in a decade's time. Having been a regular visitor to Japan as foreign investor, I'm also invested in the Australia-Japan economic relationship in a rather more personal way. In February I visited Goji in South Korea to inspect the $43 billion Iktis LNG project which is the largest ever overseas investment by a Japanese firm. During that visit I was honoured to be named the godmother of the Iktis Explorer Central Processing Facility. Now this is the largest semi-submersible structure in the world, an enormous 130 metres by 120 metres. Now that is some godchild. The construction phase alone created more than 10,000 Australian jobs. The Iktis Explorer now sits some 220 kilometres off the West Australian coast and will be managed by INPEX from Perth. When fully operational the Iktis LNG project will produce up to 8.9 million tonnes of liquefied natural gas with 70% sold or long-term contracts to boost Japan's energy security. And so this project is a great example of how governments, firms and individuals in our two countries work together for our collective greater well-being. Our two countries have learned how best to grow our respective economies through two-way trade and investment. Deepening economic relations goes hand in hand with greater respect for rules and international law without which trust and transparency between countries is not possible. Australia and Japanese voices in the region matter greatly and are especially important at the present time. The case for the international rules-based order needs to be made and remade at a time when alternative approaches or instances where international law is being ignored are on the rise. This order is one designed to protect the rights of larger and smaller countries alike. It does not predetermine the winners of the international system or entrench advantages for the privileged few. The order regulates competition and protects nations from coercion and intimidation by stronger powers. It allows nations to legitimately advance their interests and resolve disagreements amicably whenever they arise. Japan's remarkably peaceful and prosperous rise after the Second World War is a constant reminder that the international rules-based order is worth preserving. Japan has become our closest Asian strategic partner. As allies of the United States we are both vocal champions of the liberal rules-based order as the foundation for peaceful development and greater prosperity. We elevated our bilateral relationship to that of special strategic partners in 2014. I meet regularly with my counterpart, First Foreign Minister Kishida and now Foreign Minister Kono, to discuss ways that we can pursue our interests and support the region's common objectives. Our conversations are always warm and frank and constructive. In Manila last month and on the sidelines of the East Asia Summit Foreign Ministers Meeting, I met with Secretary of State Rex Tillerson and Foreign Minister Kono during an annual trilateral security dialogue to discuss how our three nations could best approach challenges in our region. These challenges are substantial and the Prime Minister and I have been in recent contact with our Japanese counterparts to discuss the behaviour of North Korea, its illegal missile and nuclear programs and the threat they posed to Japan, the Republic of Korea, our allies and friends in our region and the threat to peace and stability. And of course it was brought into even sharper focus this week following Pyongyang's sixth illegal and most powerful nuclear test, which continues its history of defiance of UN Security Council resolutions and international law. Other challenges include managing maritime disputes peacefully without coercion and in accordance with international law and preventing extreme Islamic groups from gaining and enduring foothold in Asia. The agreement and understanding between our two countries in terms of meeting these challenges and the outcomes we seek are genuine. That stems from our common interests, values and the remarkably similar way our governments and people view the world. There was strong agreement that Asia cannot take economic growth for granted including in the face of the technological revolution in automation, artificial intelligence and the internet of things that will modify how we live, work and create value, meaning economic models will change. Another important factor that Japan knows better than probably any other country is that demographic challenges from population ageing are growing and we must prepare for them. Many of these developments will be disruptive and unsettling. However, the opportunities for countries that innovate and adapt are considerable. As markets change and how we work and add value is modified innovative economies with skilled people in countries with strong institutions will thrive. In periods of uncertainty and constant change, our close partnership with Japan in all matters makes even more sense. Australia and Japan are leading advocates for freer and more open trade. The economic history of this region provides compelling evidence that free and open markets generate opportunity and will lead to greater prosperity as it allows countries to focus and excel on what they do best. Even so, the reasons for continuing to open and liberate markets need to be made and remade to all our economic partners in Asia and beyond. Protectionism is not a distant problem and has arguably found a resurgence in some populist policy platforms. As has become common with respect to our two countries, Australia and Japan are leading the way. The Japan-Australian Free Trade Agreement came into force in January of 2015. The agreement is the most comprehensive trade agreement Japan has signed with any developed economy. As it stands, over 98% of Australia's merchandise exports to Japan are able to receive preferential access or enter duty-free. Japan's private sector can now invest up to around a billion dollars in nonsensitive Australian sectors without having to seek foreign investment review board approval. This is an increase from the $252 million threshold prior to our free trade agreement entering into force. Foreign direct investment represents a long-term bet in any particular economy. We welcome Japan making ever larger long-term investments in the Australian economy. Prime Minister Abe demonstrated immense courage and tenacity in persuading the Japanese diet to ratify the Trans-Pacific Partnership last December. Australia and Japan are now championing the preservation of the principles underpinning the Trans-Pacific Partnership as these are the gold standard for free trade agreements and we are leading the way in exploring a framework for a TPP-11 in the region. Our bilateral relationship goes much deeper than trade and investment with growing cultural and community links. Ever-growing individual ties between Japanese and Australians are important to sustain the relationship. To give a contemporary example, around 1,500 Australian undergraduates have chosen to live, study and undertake work experience in Japan under the first four years of the government's New Colombo Plan from 2014 to 2017 and I know that at least another 800 students will be studying in Japan next year under the New Colombo Plan. This is a significant diplomatic and foreign policy investment in our region for by the end of 2018, just five years since the establishment of the New Colombo Plan, over 30,000 Australian undergraduates will have lived and studied an undertaken work experience in one of 40 countries in our region. There will be powerful personal links between our young citizens and they will endure over a lifetime. We are investing in the leaders of the future and we want them to know and understand and appreciate the importance of our bilateral relationship with Japan and the importance of our place in the world, the Indian Ocean, Asia Pacific. In 2019 and 2020, millions of visitors including from Australia will flock to Japan for the Rugby World Cup and the Summer Olympic Games respectively. These visitors will discover what I already know. Japan is a paradigm of a modern, successful, prosperous, vibrant and free country in Asia. With Japan and Australia as two shining examples, liberal democracy is as successful in our region as it is in North America and Europe. I trust the discussion for the rest of the day will be stimulating and productive. I congratulate the ANU for hosting this excellent event each year as both our countries benefit greatly from the interaction. Thank you. May I now call on His Excellency Mr Sumio Kostaka, Ambassador of Japan. Thank you, Shiro-san. The Honourable Judy Bishop, Minister for Foreign Affairs, Professor Brian Schmidt, Vice Chancellor of Australia National University. On behalf of the Japanese government, I'd like to thank Foreign Minister, Ms. Judy Bishop, for her excellent downlash. Ms. Bishop's inspiring remarks help frame today's discussion and illustrate very clearly and in a very comprehensive manner in the importance of Japan and Australia relations and possible directions moving forward. We are very much honoured to have Minister Bishop in attendance, who has kindly taken time out of extremely heavy and demanding schedule. I believe the Foreign Minister's presence as Japan's update is a true testament of the Australian government's view of our relationship as critically important. We all understand that our strong relationship is more important than ever to maintain a stable and prosperous region. All the economy from Japan and Australia together playing a leading role in pushing for TPP-11, which is a strong pushback against the emerging protectionist currents. Our cooperation in this area is to introduce high-level trade and investment rules in the Asia-Pacific. A major milestone of cooperation in defense is our cooperative efforts to sign the risk book called Access Agreement, which will contribute significantly to peace and stability in the Asia-Pacific. The security situation in the current Asia-Pacific is now quite intense and serious and demands our closest attention. North Korea's nuclear or hydrogen bomb testing and ballistic missile firing are totally unacceptable. It is absolutely necessary to exert maximum pressure and impose the strongest possible sanctions against North Korea to further prevent dangerous and reckless action through international solidarity, including UN Security Council resolutions. Today's Japan Update looks at Japan's challenges and examine the position and role of Japan in the Asia-Pacific from an expert with the sharpest minds. From both Japan and Australia we're also examining our relations and opportunities for the future. I'd like to sincerely thank all my fellow speakers, including those who have trouble here from as far as Japan. Hopefully today's discussion will be constructive and productive for the speakers and audience. I'm very much looking forward to free and frank discussion with all of you here today. Thank you very much. Okay, so we would like to start the final session in the morning. Now let me start the economics keynote session. I'm Ipe Fujiwara, professor of macroeconomics at the Australian National University and the KO University. We are really fortunate to have a truly distinguished speaker for this session. The speaker is Dr. Toshitaka Sekine, the director general of the research and the statistics department of the Bank of Japan. That is the current chief economist of the Bank of Japan. Thank you very much for coming here in winter despite your very busy schedule. The aim of the update is to obtain a forefront knowledge on the current policy issue in Japan so I can say without any hesitation we have the best speaker for this aim. So we are really, really lucky. Am I putting too much pressure on you? Okay, so Toshi graduated from the University of Tokyo in 1987 with a bachelor in economics and started working at the Bank of Japan immediately after. While working at the Bank of Japan, Toshitaka obtained a doctor of philosophy and economics from Oxford University. During his career about 30 years at the Bank of Japan, Toshi spent most of his time at the research and the statistics department as a researcher. So that is he has been monitoring the Japanese economy as the front-line researcher at the Bank of Japan since the mid-90s. This period almost corresponding to the so-called Japan's loss to decays. Of course I'm not saying that Toshi is responsible for the low growth in Japan but what I would like to stress is that Toshi has a tremendous real-time knowledge namely what has happened in the last 20 years or 30 years in Japan. Toshi also has experiences in working in international organizations such as IMF or BIS. The BIS is a Bank for International Settlement at the Basel and I spent also some time in the functions for monetary policy affairs and the financial stability. While working at the Bank of Japan, Toshi has published a set of influential academic papers in the top academic journals. Among them the paper about the so-called Zombie Rending which is published in 2003 is known as the one of the first formal academic investigations to this issue. Through today's keynote speech, we should be able to learn a lot about the current Japanese economy and policy issues from both practical versus theoretical as well as domestic versus global perspectives. So without a further ado, please join me in welcoming Dr. Sekine. Thank you. Well, this is a prime example so inflating the reputation is much more easier than inflating the prices which we are starting with. But anyhow, I would like to thank our organizer for having me today and this is my great honor indeed to be here. This is all the more the case that so, given that as indicated by minister so in the past this Japan updated a series of ex-BOJ economists whom I really admire these include that so former my boss the former governor Shirakawa and also that so the last year's participant Mr. Hayakawa who used to be in my position for some years ago. So given that sort of history here I'm not so sure that I can deliver a speech comparable to these great guys in a sense but let me do my best for the rest of the well, 30 minutes or something like that. In my position I will talk about Japan's macroeconomic outlook in doing so I will spend most of the time on what the Japanese firms have been doing or try to do against that so very, very serious labor shortage preparing in Japan at this moment and by doing so I would like, I hope that so I could cast some light shed some light on what the if there is some new economy emerging Japan what does it look like so that's the kind of intention of my presentation so okay then let me just start with this slide okay here you are this slide shows that so forecast of the board members this is a medium board I think out of nine board members I just take that so the medium of this forecast and the left hand side panel is the real GDP growth and the right hand side is consumer prices or core CPI inflation and if you look at the left hand side this is a kind of horizontal axis here as you can see here is a timing of the forecast and if you see that so for instance last observation here for the year 2017 the medium board of the board member revised upward the GDP growth April is 1.6 to 28 percent in July this is the last observation and likewise if you look at this green line year 2018 it used to be 1.3 now it revised up to 1.4 and year 2019 it's same 0.7 so this is a kind of real side of the picture and if you look at the right hand side panel nominal figure here well you can see that so we revised downward unfortunately if you can see let me just push back here we used to introduce 2 percent inflation target something around 2019 so you can easily see the pattern of our forecast at the outset we always predict 2 percent in 2 or 3 years of horizon but unfortunately something happened and it revised down like this and I become the chief economist somewhere here and it is no exception and unfortunately again we revised down the nominal figure or CPL so these pictures just show that so well if you go to the real side of the equation then Japan seems to be quite okay but if you have some struggle in the nominal side that's the kind of bottom line of this picture but let me just follow the real side of the picture a little bit more so this is the real GDP the level of the real GDP on your left hand side here and presumably you might have the impression that the Japanese economy has continued to stagnate for many years but in fact that so reality or the actual figure itself is something like this well of course there is some recovery here because of the Riemann crisis we got down here but after that this is continuously so recovery here of course there is up and down here is Great East earthquake related so down here European crisis introduction of the consumption tax this kind of short term so down here but if you look at the whole picture then we have continued to grow okay and average growth from here to here is 1.3% per annual and if I calculate the same thing before the Riemann crisis here from somewhere 2000 to 2017 then again the average growth rate is 1.3% and remember that so before the Riemann crisis the global economy including Japanese economy is buoyed by a lot of so good thing happening there new economy or these kind of things so this picture is just showing that so after the Riemann crisis we continue to grow so not the public image of the government or something like that and if you look at the more detail in the recent figures it tells the same story so the government will release a device figure within this week in a couple of days but the latest observation is Q2 is 1.0% Q over Q growth in the real GDP and annual rate is 4.0% and if you look at more carefully what is the kind of driving force behind this by the way this is a 6 quarter consecutive quarter growth positive growth in Japan and I've learned from yesterday's dinner that so Professor Dresdler told me that so your country continue to grow last 26 years so which is not comparable but 6 quarters is enormous for us so this is the last time so 6 consecutive quarter growth is 11 years ago so that's the telling things here and if you see a component well because of the global economy because of recover that's half of them that's half of them the last year then you can see our export push up the real GDP growth like this 0.4% 0.6% 0.3% point pushing up the real GDP growth okay but after that or subsequently this feeding to the domestic side of the economy then you can see that so the private consumption here it grows like 0.2 to 0.5 and non-residential investment 0.1 to 0.4 something like that so these growths is coming from not only the export or external sector but also the domestic sector and if you further pay attention to the public investment become positive figure here this is reflecting the last years last summers huge so stimulus package introduced by the Japanese government there is a time lag here so that means that so private demand the private domestic demand has began to increase and the public investment began to increase and at the same time we think that so this export is a kind of temporary phenomena nowadays so business intelligence a unit of the bank of Japan record to me that so Japanese for instance so electric parts manufacturers are quite busy for the sake of the new iPhone this kind of thing so I would expect this export so number becomes positive in the near future so all in all these phenomena or this number or figure tells us that so real side is very sorry ok so that is the kind of thing but if you look at the nominal side as I mentioned at the outset the story could be different the left hand side panel is core CPI measure which is CPI less fresh food so that is our number and the latest reading of this core CPI measure is here 0.5% y over y it is positive but most of this 0.5% comes from this shaded part that is energy so rebound of the energy prices just contribute the positive figures of the CPI here and if we subtract so this energy component then right hand side panel here less fresh food and energy then it fumes around 0% so that is the kind of difficulty here ok and sometimes we think that so nowadays our community central bank community is 3 major economy is just saying that so inflation is becoming softer and softer and what the hell of this something like this but I would say that so our country's situation is not serious compared with our peers this is just comparison of well this is less food and energy CPI inflation comparison between 3 major economy Japan, Germany and the US but you can easily see that so our CPI is stand out for the weakness and sometimes we just think that this might be somewhat affected by measurement problem the housing land is very very difficult to measure and especially owner occupied housing land is well notoriously difficult to measure and treatment of that measurement is quite different from country to country so once upon a time we saw that just excluding housing land just excluding one by one and finally we got some similar once upon a time we had a similar so inflation number if we excluded so this housing land but unfortunately the recent reading of the inflation is saying that even excluding this housing land so we are but lag behind so these peers ok and I think this picture is somewhat telling the current situation in the Japanese economy in a sense as you see that so 3 center banter here these two guys go ahead and I don't know why my governor is laughing at but somewhat behind these two economies so that is a kind of situation which so pictured by Jackson Hole at Jackson Hole this year ok so this is a telling sense and again so we try to spot the some in this idiosyncratic factors which might explain the current weakness of the CPI and this is a similar story in the United States well because of the budget smartphone is now in fact to Japan so which push down the durable goods here the durable goods prices is coming down because of this mobile phone component this is nowadays more cheaper so smartphone coming from the China and that explains here and the right hand side panel is communication on the telecommunication fee and this is well partly because of the government initiative try to to thrash the prices of the mobile phone then it continue to push down the so our CPI major here but this is a kind of idiosyncratic factors which we the central anchor are quite good at so spotting but this is not an entire story we need to see more broad picture that why the CPI is so weak or pushing like this way why have wage and prices demand weak despite very tight labor market so this is a kind of big picture which we want to I want to advise okay and I want to separate this issue that so wage component and price component one by one okay let me first tackle on the wage component and afterwards we want to go to the price component and this is a kind of confirmation of the wage program is here if you look at the left hand side the horizontal axis is job application job vacancy application or something like this that means if you go to the right then there is a labor shortage and we know that so this indicator to become zero at the time of the year 1990 that is a long time ago but it was a time that so we enjoyed the bubble era so that's a crazy timing for us but labor shortage it was really serious at that time which mean that so the current observation of the 2017 Q1 is zero or just about zero mean that so the current labor tightness is just comparable with what we have experienced in the height of the bubble era and if we try to change the indicator to unemployment rate or for whatever you like the picture is broadly the same and on the horizontal or the vertical axis I take the so hourly so nominal wages and at the high of the bubble era we used to have the 5% increase of the wage okay but nowadays we just have one point something so this is a kind of question which we need to answer why on us despite this very tight labor condition why wage has not why and we think that so this is a kind of so well liberation of the Japanese labor market so structure it's a kind of so dual labor market since you see that so while we Japanese labor market is has a distinct feature that so regular versus non-regular workers component and if you look at the non-regular workers component then as indicated by this so light blue line on the right-hand panel it is going up the nominal wage of them is more than 2% or like 3% nowadays so this is a kind of thing that we observe for the non-regular workers and even though I haven't brought that picture today but we know from our economic exercise that so nominal wage of the nominal non-regular workers is quite responsive to the labor market condition and we just estimate that relationship and try to extend given that current condition of the labor market how non-regular workers wage looks like which is broadly in line with what we have seen here so there is no question here that so non-regular workers wage is coming up because of the very tight labor market condition okay but the story is totally different for this blue line so thick blue line here which is regular workers component especially regular's payment of the regular workers and if I may add so what is happening here this is a kind of economics here I just try to compare that so again three major economy Germany, United States and Japan and try to estimate the so called philips curve relationships okay if you look at the very small part of the right-hand side panel then we try to estimate on the left-hand side equation and on the right-hand side equation we put something here including the unemployment rate things and also the inflation expectation or past inflation things these kind of things first please look at the alpha 2 which is a question on the unemployment rate that means how responsive nominal wage for the regular workers of the regular payment is is alpha 2 is 0.5 for Japanese situation and there's no aesthetics here meaning that so statistical speaking which is this is not significant so that mean that so regular workers regular's payment is not responsive to the unemployment rate at all so that is a kind of source here and which is totally different from the German situation which has a minus 0.5 equation here so this is totally different and next please look at 1 minus alpha 1 here 1 minus alpha is alpha 1 is a question on the past inflation rate okay in the case of Japan which has this question on 0.62 and 3 aesthetics here which is very significant okay 0.62 which is quite different from Sweden and Germany so that mean that so these guys have a kind of so wages of the regular workers is quite inflation inertia thing so last observation of the inflation expand these guys so wage cost and which is not responsive to the labor market condition and we think that so this is a situation because of the implicit long term so nature of the labor contract between regular workers and management okay and even though the current situation very tight serious labor market condition but the regular workers do not require wage height to the management so in exchange of the jobs security in the future okay so that is a kind of long term nature implicit long term nature of the wage negotiation taking place in Japan so my answer to the why wage are so weak so far given that so tight labor market condition is if you go to the non regular worker there is nothing okay no it is just going up so there is no question here but if you look at the regular workers component because of the given that so your labor market condition in Japan this guys wage is still content because of the long term nature of the implicit labor contract and fortunately or unfortunately this guys wage is explaining 60% regular workers regular statement is about 60% of the wage shares here in Japan so that's the first part and the second part is well let me just go to into this picture before going to this picture let me introduce some anecdote here given that very tight labor market condition I asked it so all the branch in Japan all the branch of the bank of Japan we have 32 branch in office in Japan and also the headquarters just collect the business intelligence information to me and how that so Japanese firm try to with the current labor market condition so that's the question I pose to these guys okay there's a bunch of the report coming to my desk and I just try to categorize this report to four group I mean the reaction coming into the report can be categorized into the four group in a sense then number one group is laser wage and laser prices which is fantastic thing to see for us isn't it but the prime example is Yamato transportation is there any guy that know the Yamato Umiyo or this kind of company Yamato transportation is a dominant transportation company in Japan and because of the very serious so shortage in drivers these guys decided to raise the wage for the drivers and and also at the same time they decided to raise their fees for transportation fees against for example Amazon.co.kp or something like this okay and I think this is of course we want to see this kind of reaction and I pose a question that so how many how many firms in Japan just try to follow that so Yamato transportation and as I mentioned that so business intelligence unit gather the information and the report to me that so the answer is not many but very few to be honest what I have been reported is transportation industry is because of the Yamato transportation is such a dominant company so even the small and medium transportation company in the rural area just try to follow this dominant company so there is some increase in the wage in drivers and also fee for the transportation so that is quite exceptional so that is what we observed so that's refit into the second so group okay then second group is try to raise investment for the labor saving so CAPEX capital expansion and now a day that so Japanese firm are very keen on expand the capital investment just for the sake of saving the labor shortage or labor there if you go out to the rural area in Japan that so you can easy pop into the supermarket then you can find that so self so cash register or these kind of things now become more and more popular even in the rural area in Japan and likewise that so one by one this company try to expand or introduce some capital investment and in order to to save the labor force here and now a day that so our survey shows us that so this fiscal years business investment is planned to increase by six percent annually against that so 1.5 is in last year's observation and we think that so part of the explanation of this so increase in the investment is coming from this labor saving things so that is the number two category and the number three category is just reconsider that so business process this is the number three things again that so example here is for instance that so it used to be the case that so Japanese fast food restaurant operate 24 hours per day and but you if you think that so well if you want to have a rice ball or beef ball or something like that whether you want to have it in the two o'clock in the morning or three o'clock in the morning how many people would like to have it fortunately and fortunately these guys compete each other and try to open the operation 24 hours okay but given that so the labor shop is here they just began to think whether this is a viable option some of the fast food restaurant sees to the rest well stop, shut down the restaurant about the time of the 10 o'clock in the evening which is I think it's healthy okay and also that so again let me so pick up the Yamato transportation again these guys are thinking that so the same delivery is quite costly for the drivers okay and they sees to to doing it or just try to do it except fee on same day which makes sense for me again okay this kind of so business so practice reconsideration is one by one try to do something for the against the labor shortage but let me just ask one question how many people know that so Japanese word of here so some people and please let me know that how to translate into English that's the next question I have always difficulty to how to translate this in Japanese hospitality could be courtesy or goodwill service that sort of thing but bottom line here in order to show hospitality, courtesy goodwill we Japanese service sector provide extra service without fee so that's the sense of the motenasi and now there's these guys thinking about whether they can continue this motenasi things given this labor shortage here or otherwise they wanted to charge something and the similar story can be hard in the workplace as well these days the Japanese firms are quite keen on raising the retention rate of the female workers and these guys really wanted to retain the female workers in the office to the extent possible and because of the retention rate because of the child there and all these kind of things and of course many Japanese firms give the option to the female worker to leave the office with a shorter working hours say four o'clock in the afternoon or five o'clock in the afternoon you can leave the office and just go back to your home so that kind of thing is quite popular in Japan but some firms find that so even they give this kind of opportunity to female worker this is Japan so these female workers quit the job without taking this option the reason here is these female workers feel guilty because they give the office and her colleagues is in the office until the time of the midnight or 10 o'clock they feel some guilty here and we want to promote these ladies to the higher level again they decline to that sort of promotion because they understand that if they are promoted to the higher level the order manager stay in the office until 10 midnight something like this we cannot continue it so that's a kind of reaction and the president of some company is all of a sudden think that hey this is a serious problem you guys need to leave the office hold the employees here need to leave the office by the time of the 7 o'clock you guys leave here okay the reaction coming from before is of course this is crazy and I can easily have sympathy with that but well these guys are very managed their operation by staying the office 10 o'clock or midnight something like this but all of a sudden president is saying hey you need to go back to your home by the time of the 7 o'clock but again this is a kind of Japanese situation if these guys are forced to leave the office then individual workers just rethink their business process and try to get rid of one by one most unnecessarily part of their business and after all this president finds out that their sales never draw even with this short time horizon and presumably last of the third story and second story is similar to illness they are raising the labor productivity in Japan in either way capital extension or just reconsidering their business process and one by one these kind of things so raise the labor productivity in Japan and if I may this reaction is these guys do not do anything and complain about the B.O.J and that's it but let's forget about this course category and well my point here is second and third is raising the productivity here and let me recap that sort of on the right hand panel here as I mentioned that Japanese firms contain little increase of the wages by regular workers component payment of the regular workers component so as a consequence real wage is moving sideways or increase a little bit that is what is happening on the real wage side but if you look at the labor productivity it has going up like this okay so this is the kind of thing what is happening here you see that so the gap between these two measures which is plotted as a real wage gap here then because the labor productivity is going up and the real wage is just moving sideways it goes down like this and the real wage gap is just what we made this kind of terminology here but you can easily translate it is a kind of unique labor cost or if you are much more familiar with economics which is labor share of income so nothing about that so it comes down like this and this exerts downward pressure on the prices which we try to find out well in the regular ascending sense this exercise has a lot of reservation I must admit it but we just plug this real wage gap since into the usual fixed card relationships and when you look at the right hand side one it's a small letters here but the left hand side equation is inflation itself okay and the right hand side equation is again inflation expectation and past inflation and y gap is a output gap and the w gap is this wage gap and we estimate it here beta 3 is a coefficient on that which is marginally significant and has a coefficient of 0.05 and which exact the downward pressure which is shaded by the same here which is pushed under the real the CPR inflation by 0.2 or 0.3% point these days and whether this is a big number or a small number it is I mean arguable things and we spent a lot of time in the bank of Japan whether this is too much or too small or something like that but instead of going to that sort of technical details I wanted to raise another technical thing here well if you are not so economics major this is something that so we economists tend to think in a stupid way I don't know and for the economists that so this is economics 101 I just well this horizontal axis is labor input vertical axis is capital input and this culture here is a production function so the same amount of output is created by combination of the labor input and capital investment and we just put it here and presumably at the outset we might be in the position of the E1 and because of the substitution from the labor to the capital which might shift to the E2 so E2 you can see that the labor input becomes smaller and capital input becomes larger that means the substitution between the labor to the capital things and that is a kind of one situation which might describe the kind of situation which is presumably related with my second anecdote more capital investment but I might argue that so third anecdote might be a little bit different from this situation just reconsidering the business process could be a kind of innovation or technological progress that is another terminology which we the economists try to use on the right-hand's panel I shifted the coefficient of A which is a kind of technological progress then the entire curve of the isocont curve shifted to blue line to the right one the red one then if you see that so E2 to E3 again labor is so smaller and same amount of the output is created by this shifting the culture then labor productivity has increased so my story here is in economics time we might be able to see that so a hike in the labor productivity either coming from the substitution story or technological progress story why we are both about this kind of complicated story which is presumably for non-economist people that so it's a crazy thing but this has a quite important implication for us in the case of the substitutions well I might say that so both have happening in Japan but we asked which one is more dominant that is the kind of question which we have and if that so left-hand side panel is really dominant and labor is really substitute to the capital investment or capital itself then with a certain condition then with certain condition the real wage gap which I introduced before declined like this and this decline is permanent and in the case of the right-hand side panel technological progress well sometime in the future the real wage should catch up higher labor productivity that means that so this real wage gap going back to the original position so that is the kind of thing and whether that so this kind of situation happening or not of course from our point of view has a very very serious implication here which is permanent and to be honest that so the labor income share is so coming down not only in Japan but also other countries as well and if you look at if you read the chapter 3 of the April how to create it by the fund economists they argue that so because of the substitution that so labor share income is coming down like this and they argue that it might not be the case if we do this kind of estimation of the substitution quotient here well I don't go on to go to the detail here but this sigma portion is a substitution and if this sigma is beyond that one then that means that so this is a certain condition which economists attach to that the substitution substitution and labor share income is with certain conditions is this substitution quotient become more than one that is in more plain English that so if this substitution is really enormous then labor is forced to substitute by capital then there is no compensation for the labor that's the kind of storyline here but if we estimate the sigma on the left hand side panel then sigma never becomes one okay if we just I think then it becomes one could be one but it's just only for the manufacturing sector so after doing this kind of exercise we think that's presumably substitution between labor and capital is never beyond one that means that from our point of view the real wage gap should come up somewhere in the future this kind of downward phenomenon for us is sort of temporary phenomenon rather than permanent so that's the kind of thing okay and having said so presumably raising the labor productivity is not important not only for the central bank but also the Japanese economy as a whole and this is a kind of so long term so gross picture in Japan that so we used to have in the 1970s that's four or five percent gross there and which is coming from that sort of labor productivity which is this area with a line but which declined like this one percent or something like that as economy matured okay and if you look at the shaded part this number of workers as you know that so this is what we have a very negative demographic factor here presently in 20 or 30 years this shaded area becomes minus one or something like that okay in order to prevent our economy from shrinking then labor productivity should be as such so for us so raising the labor productivity is enormously important and whether we can do it or not presumably we might be able to do that or that is a kind of final picture which I want to introduce this is a kind of well measuring the labor productivity is very difficult to understand and the professor Jorgensen is a kind of the world leading economist who really wanted to measure any kind of labor productivity or any kind of country so this is a kind of figure which I trust most okay and these guys just try to measure the labor productivity in Japan and compare them with the United States and this picture is saying that the United States is one and the last observation here Japan's labor productivity there all the productivity is 0.6 mean that so we are just 60% of the United States labor productivity of course there is a lot of argument here measurement problem etc etc but as I mentioned this is a world so leading figures is so creating this number so there is ample room for us to further raise labor productivity so that's a kind of thing here well presumably we might need to reconsider further so whether we need to continue on this kind of thing but presumably one by one we might be able to raise so productivity in Japan so let me just sum up my story today first solid economic recovery is taking place in Japan and relatively strong real growth can be expected for the time being that is the number one part number two part is despite the solid recovery price remains weak and the higher productivity and the slower wage for increase of regular workers could be one reason behind this weakness so that is the number two and the number three is as long as the productivity is increasing we can expect price will start to increase at some point of time I don't know when but at some point of time on that score so this downward pressure is temporary phenomena which we central bankers can accommodate so that is the number three and the number four tight labor market condition together with presumably improvement of the government growth strategy may become a good catalyst to the raising productivity in Japan because as I mentioned that so as an anecdote so what is really trigger that so the Japanese firm to raise the productivity is of course it's some sort of implementation of the labor market before this kind of thing but not government but also importantly labor shortage itself is really push hard this guy to further raise the productivity so that means that so well I would say that so the labor shortage or in our jargon the Janet Yellen of the Fed chairwoman is now saying that so called high pressure economy is a kind of word which we use might raise the labor productivity in Japan so if we continue the current high pressure economy it couldn't be the case that we can have new economy of Japan which is half the rise by higher labor productivity and also hopefully by higher inflation that's the story of Naiman so thank you very much thank you very much for your insightful presentations your productivity story reminds me that around the 2000 in your figures it was a low productivity we worked always from 9am to 12 midnight so I think at that time our productivity was very low and I think we did too much or too many in the Bank of Japan so we have 10 to 15 minutes to have questions so this is a great opportunity to ask the questions to the chief economist of the Bank of Japan so if you have any questions please raise your hands could you tell your name first Bronwyn Evans CEO of Stanley's Australian member of the Australian Japan Foundation Dr Sekine I was struck by your comment that even in spite of a tight labor market one reason for the low wage growth was probably people still in job security and staying in jobs a long time in Australia we're seeing young people want to stay in a job for 18 months or two years and change and perhaps have 11 jobs in a lifetime is that trend starting to emerge in Japan presumably so still that's so the Japanese youngsters some of the Japanese youngsters to go to the venture business or this kind of thing but I would say that so well if you look at the young graduate from the esteemed university most of the guys wanted to secure their job in the big firms so and that's the reason why small and the minimum enterprise these days have particular difficulty in hiring that sort of young stuff there so on that score there's not much significant change taking place as yet but as if I may add one thing here distinction between regular and non-regular workers is presumably becoming a little bit more broad in a sense because of the serious labor shortage some of the Japanese firms tend to provide or try to change the status of the non-regular workers to regular workers to give some sort of job security there and just try to attract this temporary stuff to their company so and also that's a government initiative of the same wage, same work same job is a kind of initiative which might so change the structure of this real labor market to regular but non-regular because same wage for the same job so that might in the future further shift in the labor market condition but we haven't seen much as yet is it okay? do you have a further? any more other questions? yeah, please great trying to improve the university I'll try hopefully then my area too much given you talking about the problem of wage weakness and price weakness does that sort of impact on in a sense deferred consumption and also savings like the percentage of savings as part of wage and also has there been impact on the pension or Lincoln system as well? that's a good question I must say I tend to think that in more it's a kind of consequence and a kind of cause could be isn't it? so this is a kind of general equilibrium thing we need to sort out everything at the same time it could be the case of the uncertainty of the pension or this kind of thing in the future which might feed into the higher savings household sector which might account for some weakness in the CPI or wage or these kind of things and again that might be causality here and of course given that this weak development of softness the nominal side presumably the pension funds budget itself is becoming more shaky in a sense other than inflation is really high fine because of the interest rate is so low so if you put that thing in the picture then presumably there's a lot of things taking place and there must be some cause and consequence here so that is my answer to your question yeah Murray McLean I wanted to ask you about external factors on the economy in particular the growth in tourism from China at least a year ago certainly maybe it's receded a little bit the impact of that seem to be quite significant on consumption on patterns and that sort of thing and also I think you did talk about trade flows but also perhaps on the services side that would be interesting yes well it is another government initiative that so far has tried to attract the foreign tourists to Japan and presumably we have already observed that a lot of people coming to Japan especially from China and to end this presumably continuing still so if you look at the more latest figure then you can easily see that so Chinese tourists coming in Japan still and grab a lot of things in Japan and our expectation here is presumably around the time of the Tokyo Olympics which is finally in 2020 presumably tourists is coming up so on that sort of trend and this is a really important thing that so presumably these kind of things try to modernize the services in Japan because these guys think about that so Ryokan or hotel in Japan so these guys want to try to attract foreign tourists to there then they try to go to the internet business and try to attract more foreign tourists coming to this Japanese old style hotel or something like that that could create more incentive for them to raise the level of productivity and again this is kind of an anecdote story that so I have a report that so the older Ryokan in Japan try to attract more tourists by innovating more, stepping these IT things are in fact still not in most of the Japanese Ryokan but these young so Ryokan owner is good at computer or these kind of things they all of a sudden try to expand this thing their level of productivity become triple as such so this is a good example why we can expect something from that Thank you very much Veronica Taylor at ANU Thanks Dr Sekine for a really terrific presentation I was interested that you didn't mention any modelling on the possible effects of migration and I wonder whether that's because you think labour migration is not a solution to the problems that you're sketching or whether it's still too politically sensitive it's a topic that we discuss annually at the Japan update so I'm interested in your views I mean well presumably so this immigration on migrants thing is presumably more political so same that so which should be discussed by the politicians but having said so what is happening in Japan is well there's well first of all government welcome the high skilled labour even from the foreign country that's there to it but at the same time you can easily see that so foreign workers has already more than a million in Japan that is government statistics okay and it is increasing and one thing which so I was surprised this summer time that so I went to the Mayabashi you know the Mayabashi I don't know it's a rural area okay and with my son and I step in the there and and I knew beforehand this day that so workers in McDonald's is a lot of workers is foreign so people and I can easily see that so name time here is not Japanese at all and their Japanese is not fluent as a native Japanese town okay but at the same time what is surprising for me is not only the worker but also the customers are holding it as well even in the rural area in Mayabashi it's a not sightseeing spot at all that mean that so these guys are labour there working for something there so that mean that so while presumably government statistics just cover this kind of thing but presumably on the marginal sense Japanese firms have already utilized that labour so that is presumably what is happening in Japan okay yeah Manio Hi Toshi Thank you for sharing with us a very rigorous and good contribution to this argument which is very important for most economies including Australia I have a question related to two of your graphs one is that productivity in Japan has been growing quite well in the last couple of years but at the same time compared with the US productivity it still remains fairly flat and unchanged can you give me a sense of what you think Japan needs to do to close that gap even further like it was in the late 80s well the gap between the United States and Japan is mostly coming from the service sector that is what Professor Jogensen is trying to spot but even though there is no that figure in my lecture here but when the professor came to Japan and I just met him at the conference in this summer and he mentioned that this is almost coming from the non-manufacturing sectors that means that presumably the Omotenashi story is somewhere here so well if you people are coming to Japan and expect this is a disappointment story but having said so we need to change something for you guys coming from our roles so that is the story here and presumably that is the one thing but having said so your question is how we are going to do it is a kind of question I am trying to mention but lack of time here I wanted to see more growth strategy here and the government is really doing it under the of the economics and this is a kind of beaver market reform which is so initiated by the current government and their implementation is very important like that so same job, same wage or something like this but I would like to emphasize here that so the company's voluntary reaction or response to the labor shortage is also quite important and that means that so as I mentioned that is the very last part of my speech that so if we can continue this high pressure economy then that means that the labor shortage becomes more and more serious then more and more firms in Japan try to raise the labor productivity without any sort of forceful something like that so they are voluntarily trying to create some sort of innovation to further raise the labor productivity and as I mentioned that might come from the service sector so we may have more questions but the time is running up so you would like to close the session so if you have any questions please talk to Toshi about the lunch or something so please join me in thanking Toshi for the fantastic presentation