Speech by Board Member MASU at a Meeting Held by the Kagoshima Keizai Doyukai (Economic Activity, Prices, and Monetary Policy in Japan)

M a y 14 , 202 6

B a n k o f Ja p a n

Speech at a Meeting Held by the Kagoshima Keizai Doyukai

Member of the Policy Board

(English translation based on the Japanese original)

It is my pleasure to have the opportunity to address you today at the meeting held by the Kagoshima Keizai Doyukai. I would like to take this chance to express my sincere gratitude for your cooperation with the activities of the Bank of Japan.

I will begin my speech by talking about recent developments in economic activity and prices in Japan and then move on to discuss the conduct of monetary policy, while offering my personal views. I hope my explanations regarding these points will help you better understand the overall picture of the factors the Bank is paying attention to in its conduct of monetary policy.

U.S. Tariff Policy

Before discussing developments in economic activity and prices, I would first like to touch on some events that have taken place over the past year. In the 10 months since I was appointed as a member of the Policy Board in July 2025, two major events have given rise to problems internationally, both of which involve the United States.

The first is tariff policy under the current administration. There were concerns in Japan not only over a decline in the share of Japanese products sold in the United States, but also over the broader possibility of a downturn in the U.S. economy triggering a global economic slowdown. The left panel of Chart 1 shows developments in U.S. private consumption in real terms, adjusted for inflation, and the middle panel presents the employment situation. Economic conditions in the United States are clearly reflected in consumption and employment. Compared to Japan, people in the United States tend to spend more when the economy is flourishing, and firms tend to lay off workers when it is not. Also, unlike in Japan, it is quite normal for workers to move to another company, so being laid off is generally not too much of a concern. Hence, the employment situation is quickly reflected in data, and serves as a clear indicator of economic conditions. As is evident from the chart, consumption and employment in the United States have been more or less solid, despite showing some weakness.

Japanese and some European automakers responded to the additional tariffs by bearing the increased costs themselves while keeping selling prices in the United States unchanged, but such cases were quite exceptional. As shown in the right panel of Chart 1, higher tariffs have in general led to an increase in U.S. import prices. The solid line represents import prices including tariffs; the recent decline is partly a result of a reduction in tariff rates following the

U.S. Supreme Court's ruling that the tariffs were unconstitutional.

Estimates indicate that the additional tariffs have been passed on to selling prices for consumers in the United States. At any rate, statistical data have hardly indicated a reduction in the country's trade deficit -- one of the stated aims of U.S. tariff policy. This makes it highly likely that U.S.-based firms and households in the United States will end up shouldering the burden of additional tariffs.

If another aim of the tariff policy was to bring overseas production back to the United States, I believe the policy's effectiveness has been limited, in part a reflection of high personnel expenses in the country. Setting aside the outcomes the tariff policy has ultimately produced, neither higher inflation nor deceleration in economic activity -- both of which were initially feared to be potential side effects of the policy -- has been observed in the United States.

Now, I would like to talk about the impact of U.S. tariff policy on Japan's economy. Although economic growth should ideally be assessed using GDP, quarterly GDP data often show large fluctuations. Since there is a time lag before annualized GDP data are released, for the sake of timeliness, let me refer to the Bank's survey on business conditions in the Tankan (Short-Term Economic Survey of Enterprises in Japan). Please take a look at the left panel of Chart

2. The survey covers approximately 9,000 firms, ranging from large to small firms, with a high response rate of basically over 99 percent. According to the most recent results, the diffusion index for business conditions -- the proportion of firms responding that business conditions were "favorable" minus the proportion of those responding that they were "unfavorable" -- stood at a positive 18 across all industries, registering the index's highest level in 35 years since 1991.

The right panel of Chart 2 is an indicator, also released by the Bank, that combines various data to represent overall consumption in Japan. This indicator also shows a gradual improvement in consumption.

In sum, although the whole world has wrestled with the issue of U.S. tariff policy since spring 2025, unexpectedly, the issue appears to be winding down without causing any economic disruption in Japan. I believe, for many people, attention has now shifted to the Iran situation, which is the second major international event that has taken place in the past 10 months.

The Iran Situation

While U.S. tariffs have primarily impacted sectors that have high export volumes to the United States -- such as automobiles and large machinery -- the Iran situation is expected to have far broader repercussions. Unlike tariffs, this situation involves a physical constraint, in which the global supply of crude oil and natural gas has tightened, placing central banks worldwide in an unusually difficult decision-making environment. This is because energy shortages could induce both a deceleration in economic activity and a rise in inflation.

The effects of the closure of the Strait of Hormuz need to be broken down into two aspects: prices and quantity. Normally, prices rise when there is a shortage of supply. What is notable in the present case, however, is that prices are rising even while supply remains adequate. This is particularly evident in the case of liquefied natural gas (LNG) prices. Drawing on my previous role at Mitsubishi Corporation, a general trading company, I would like to elaborate a little on this point.

During the oil shocks of the 1970s, oil-fired power generation accounted for around 70 percent of Japan's energy mix. Today, however, LNG and coal each make up about 30 percent of the mix -- around 60 percent combined -- while oil-fired power is limited to a fairly small share of the mix, mainly used to meet peak demand. As for LNG, only imports from Qatar and Abu Dhabi pass through the Strait of Hormuz and, because contracts with Qatar are down from their previous levels, imports from these two countries only account for around 6 percent of Japan's total supply. The largest sources of Japan's LNG are Australia and Malaysia, with additional imports coming from Sakhalin in Russia and from the United States. Moreover,

many of Japan's LNG import contracts are long-term agreements, spanning around 20 years. This is because LNG production requires massive facilities costing trillions of yen to cool natural gas to minus 162 degrees Celsius for liquefaction, and investment in such projects can only move forward once long-term sales commitments are secured. There is therefore no near-term cause for concern that lower import volumes to Japan would disrupt power.

Prices, however, raise a different concern. Since LNG was originally introduced in Japan as a substitute for petroleum, and because Asia lacked its own natural gas pricing benchmark, many contracts are linked to Middle Eastern crude oil prices. Because LNG prices in Japan are calculated from the import prices of Middle Eastern crude oil recorded in Japan's Trade Statistics, changes in crude oil import prices are reflected in LNG prices with a time lag of around four months. In any case, a significant increase in LNG prices is unavoidable in the near future. As a result, although Japan generates electricity and gas using LNG, not crude oil, the prices of both will inevitably rise. This is the concern that primarily relates to prices.

In the case of crude oil, Japan's dependence on the Middle East has increased, partly as a result of a reduction in Russian imports following that country's invasion of Ukraine. Amid the unrest in Iran, Japan is currently facing a situation in which slightly more than 70 percent of its crude oil imports pass through the Strait of Hormuz. Even if Japan scrambles to find alternatives, it will have to contend with fierce global competition. In the event that releasing petroleum reserves and securing alternative sources of supply prove unable to meet demand, transportation fuel derived from crude oil -- such as gasoline, jet fuel, diesel, and marine heavy fuel oil -- will be in short supply. Petroleum-based chemicals could face even tighter shortages than fuels, potentially affecting everything from automobile parts to the food trays found in supermarkets. The crude oil shortage may also impact the data center construction boom, since the polyvinyl chloride (PVC) used to insulate electric wires might become scarce as well.

Given how widespread plastic products have become over the past 50 years, the possibility that the impact on everyday life this time around could be more serious than the first oil shock in 1973 warrants attention.