Chart 1

Real GDP Growth Rate and Output Gap
10 8 6 4 2 0 -2 -4 -6 -8 -10 1990 % Output gap (left scale) Real GDP (right scale) y/y % 10 8 6 4 2 0 -2 -4 -6 -8 -10 92 94 96 98 2000 02 Year 04 06 08 10 12

.

Sources: Cabinet Office; Bank of Japan.

Chart 2

Price Developments
5 4 3 2 1 0 -1 -2 -3 -4 1990 92 94 96 98 2000 02 Year 04 06 08 10 12 y/y %

Core CPI (excluding fresh food) CPI (all items)

Source: Ministry of Internal Affairs and Communications.

Chart 3

Current Account Balance at the Bank of Japan and Overnight Call Rate
% 0.20 tril. yen 45

Uncollateralized overnight call rate (left scale)

40

0.15

35

30 0.10
Final target ¥ 30-35 trillion (right scale)

25

20 0.05 15

0.00
Initial target ¥ 5 trillion (right scale)

10

5

-0.05 Mar-01

0 Sep-01 Mar-02 Sep-02 Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06

Source: Bank of Japan.

Chart 4

Impacts of the Quantitative Easing (QE) Policy

Expanding the size of the balance sheet (monetary base)

Forward guidance

Altering the asset composition of the balance sheet

Lowering the risk  premiums

Lowering the expectations  for the future path of  short‐term interest rates

Chart 5

Japanese Yen Exchange Rates
40 60 Depreciation of the yen 80 100 120 140 160 180 Vis-à-vis U.S. dollar Vis-à-vis euro Nominal effective exchange rate of the yen 2000=100, reversed Appreciation of the yen

200 1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 12 Year
Source: Bloomberg.

Chart 6

Monetary Base in Major Economies
(1) Japan
tril.yen 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 1990
Zero interest rate policy Comprehensive monetary easing

% of GDP 50

In yen (left scale) In % of GDP (right scale)

Quantitative easing

40

< 2012> ¥ 123 tril. 26% of GDP

<1990> ¥ 38 tril. 9% of GDP

30

20

10

0 92 94 96 98 2000 02 Year
% of GDP 50 In U.S. dollars (left scale) In % of GDP (right scale) 40 < 2012> $ 2.6 tril. 17% of GDP

04

06

08

10

12

(2) United States
tril. U.S. dollars 3.0 2.5 2.0

30 1.5 1.0 0.5 0.0 1990 10 <1990> $ 0.2 tril. 5% of GDP

20

0 92 94 96 98 2000 Year 02 04 06 08 10 12

(3) Euro Area
2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 2000

tril. euros

% of GDP 50 In euros (left scale) 40 In % of GDP (right scale) < 2012> € 1.7 tril. 18% of GDP

<2000> € 0.5 tril. 7% of GDP

30

20

10

0 01 02 03 04 05 06 Year 07 08 09 10 11 12

Sources: Cabinet Office; Bank of Japan; Federal Reserve; European Central Bank; Eurostat.

Chart 7

Transmission Mechanism of Quantitative Easing (QE)

Monetary easing
Zero interest  rate policy Purchase of  JGBs  and other assets

Forward guidance
Financial and capital markets
Bank loans T‐Bills JGBs Interbank transactions Other financial  assets

First stage

Second  stage

Real economy and general prices

Chart 8

Bank Loans in Major Economies
(1) Japan
tril.yen
1,000 900 800 700 600 500 400 300 200 100 0 1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 12 0 60

% of GDP
140

In yen (left scale) In % of GDP (right scale)

120

100

80

<1995> ¥ 535 tril. 106% of GDP

40

<2012> ¥ 398 tril. 84% of GDP

20

Year

(2) United States
tril. U.S. dollars
14

% of GDP
140

12

In U.S. dollars (left scale) In % of GDP (right scale)

<2012> $ 7.1 tril. 45% of GDP

120

10

100

8

6

<1995> $ 2.4 tril. 34% of GDP

80

60

4

40

2

20

0 1995 96 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 12

0

Year

(3) Euro Area
tril. euros
14

% of GDP
140

12

In euros (left scale) In % of GDP (right scale)

120

10

100

8

80

6

<2012> € 9.9 tril. 104% of GDP <2000> € 5.3 tril. 82% of GDP

60

4

40

2

20

0 2000 01 02 03 04 05 06 07 08 09 10 11 12

0

Year

Sources: Cabinet Office; Bank of Japan; Federal Reserve; European Central Bank; Eurostat.

Chart 9

Size of the Asset Purchase Program
120 110 100 90 80 70 60 50 40 30 20 9 2010 12 3 11 6 9 12 3 12 6 9 12 3 13 6 9 12
Started in Oct. (2010) 35 tril.yen Mar. (2011) 40 tril.yen

tril. yen
Maximum amount of the Program Actual amount of increase
Schedule
Dec. 101 tril.yen Oct. 91 tril.yen Sep. 80 tril.yen Apr. Feb. (2012) 70 tril.yen 65 tril.yen Oct. 55 tril.yen Aug. 50 tril.yen

End-Dec. (2013) 101 tril.yen

Note: Dates indicate the intended timescale for completing the increase.

Chart 10

Transmission Mechanism of the Comprehensive Monetary Easing (CME)
Monetary easing
Forward  guidance

Zero interest rate policy

Purchase of diverse assets

・JGBs, T‐Bills ・CP, Bonds ・ETFs, J‐REITs

First stage

Financial and capital markets Second  stage Real economy and general prices

Chart 11

Interest Rates
(1) Bond Yield Curves
0.4 %

(2) Lending Rates on New Loans
1.8 %

(a) Sep. 30, 2010 (before the CME policy) 0.3 (b) Dec. 12, 2012 (a)

1.7 Long-term 1.6 1.5 1.4 Short-term

0.2 (b)

1.3 1.2

0.1
Interest rate applied to the deposit facility (0.1%)

1.1 1.0 0.9
O/N 3M 6M 1Y 2Y 3Y 5Y

0.0

2007

0 8

0 9 Year

1 0

1 1

1 2

Sources: Bank of Japan; Bloomberg.

Chart 12

Demographic Changes in Japan
140

mil. of persons Forecast

120

100

80 Children and elderly population 60 Working-age population (15-64 years) 40 Total population

20 1990

95

2000

05

10

15

20

25

30

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

Chart 13 Total Fertility Rates in Japan, the United States, and Europe
3.0 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 1990-94 95-99 Year
Note: The figure refers to the number of children per woman if she bears children in accordance with current age-specific fertility rates. Source: United Nations.

Japan Italy

Germany United States

2000-04

05-09

Chart 14 Elderly Dependent Ratios in Japan, the United States, and Europe
45 40 35 30 25 20 15 10 5 1990 92 94 96 98 2000 02 Year 04 06 08 10 12 14

Japan Italy

Germany United States

Note: The figure refers to the ratio of the elderly dependent population (65 years and over) to the working-age population (15 to 64 years). Source: United Nations.

Chart 15 Life Expectancy at Birth in Japan, the United States, and Europe
(1) Female
90 88 86 84 82 80 78 76 74 72 70 1990-94 95-99 2000-04 05-09 years

Japan Italy

Germany United States

Year
(2) Male
years

90 88

Japan
86 84 82 80 78 76 74 72 70 1990-94
Source: United Nations.

Germany United States

Italy

95-99

2000-04

05-09

Year

Chart 16 Projected Working-Age Population Trends in Japan, the United States, and Europe
140 Year 1990 = 100
Japan Germany United States

130
Italy

120

110

100

90

80

70 1990

95

2000

05 Year

10

15

20

25

30

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

Chart 17 Projected Total Population Trends in Japan, the United States, and Europe
150 Year 1990 = 100

Japan

Germany United States

140
Italy

130

120

110

100

90 1990

95

2000

05 Year

10

15

20

25

30

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

Chart 18

Real GDP Growth Rate in Japan
6 5 4 3 2 1 0 -1 -2 1970s 80s 90s 2000s 10s 20s 30s
Note: The growth rate in the number of workers from 2011 onward is calculated using the projected future population (medium variant) and labor force participation rates (assuming that the labor force participation rates in each age/sex group remain the same as in 2010). Sources: Cabinet Office; Ministry of Internal Affairs and Communications; National Institute of Population and Social Security Research.

y/y % chg.
Productivity growth (per-worker real GDP growth) Growth in the number of workers Real GDP growth

+0.9% +0.8% Forecast

+0.5% -0.2% -0.6% -0.8% -1.2%

Chart 19

Potential Economic Growth and Firms' Economic Growth Expectations
%
5 4 4 3 3 2 2 1 1 0 -1 1990 93 96 99 2002 05 08 11 Potential GDP growth rate Expected growth rate (corporate)

Fiscal year
Note: Expected growth rate (corporate) refers to the outlook for real demand growth rate three years ahead for industry in the Annual Survey of Corporate Behavior (Cabinet Office). Sources: Bank of Japan; Cabinet Office.

Chart 20

Inflation Expectations in Japan
4 3 2 1 0 -1 -2 -3 1990
y/y, %
Trend inflation (Nishizaki et al. [2012]) Trend inflation (Saito et al. [2012]) Consensus forecast (6-10 years)

92

94

96

98

2000 Year

02

04

06

08

10

Sources: Nishizaki, Kenji, Toshitaka Sekine, and Yoichi Ueno, "Chronic Deflation in Japan," Bank of Japan Working Paper Series, No. 12-E-6, 2012; Consensus Economics Inc.

Chart 21

Bank of Japan's Efforts to Cope with Structural Issues
Bank of Japan
First stage

Aggressive monetary easing

CME Policy

Asset purchase Zero interest rate  policy
Second stage

Accommodative financial conditions
Loan Support Program

Government Firms Financial  institutions

Growth‐Supporting Funding  Facility Total amount: 5.5 trillion yen Stimulating Bank Lending  Facility Total amount: Unlimited

Real economy and general prices