IMF Executive Board Concludes 2019 Article IV Consultation with Japan

February 10, 2020

On January 30, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Japan.

The Japanese economy is growing above its estimated potential, despite a significantly weaker external environment. Private consumption and public spending supported growth in the first three quarters of 2019, while exports and export-driven investment have softened in line with weaker external conditions. The two-percentage point increase in the consumption tax rate in October 2019 appears to have had less impact than the last rate increase in 2014, due in part to government countermeasures. Real GDP growth is estimated to be above potential in 2019 at 1.0 percent. While the output gap is narrowing and labor markets remain tight, overall wage growth and inflation expectations remain stagnant. CPI headline inflation and the BOJ’s core-core inflation (excluding fresh food and energy) have risen in recent months but remain below the Bank of Japan’s two-percent inflation target.

Japan’s external current account surplus is estimated to have shrunk in 2019 to about 3.3 percent of GDP, reflecting a smaller goods trade balance due to adverse external conditions. Japan’s income surplus—arising from its large net foreign asset position and high net returns—accounts for the bulk of its current account surplus. Over the last four decades, the current account surplus has been relatively stable, with rising corporate savings being offset by public sector and household dissaving. Through November 2019, the yen appreciated by 2.5 percent (in real effective terms) relative to end-2018, although markets remain volatile reflecting changes in global risk aversion and the monetary policy stances of major central banks. As with the 2019 External Sector Report, the 2019 external position is preliminarily assessed as broadly consistent with medium-term fundamentals and desirable policies.

Underlying growth is expected to remain resilient, bolstered by fiscal and monetary support, with near-term inflation reaching about one percent. Macroeconomic challenges will increase as demographic headwinds intensify. Supportive near-term fiscal policy and continued monetary accommodation will help sustain growth momentum and support reflation, while there is a need for gradual fiscal adjustment and consolidation, given fast-growing age-related expenditures. Structural reforms will lift long-run growth and support reflation, while strengthened financial sector policies will help contain the build-up of systemic risks. Over the medium term, growth is projected to moderate to near potential and the output gap will gradually close. Headline inflation is expected to edge up slowly but remain below the Bank of Japan’s two-percent target.

Executive Board Assessment [2]

Executive Directors welcomed Japan’s resilient economic growth performance despite external headwinds. Directors noted that inflation remains below target and downside risks weigh on the outlook, including from adverse demographics and weaker global growth. Against the backdrop of an aging and shrinking population, which has become central to Japan’s macroeconomic policies and outcomes, Directors emphasized the need to strengthen the mutually reinforcing policies of “Abenomics” and accelerate reforms to achieve sustained high growth, durable reflation, and public debt sustainability.

Directors agreed that monetary policy should remain accommodative while improving coordination with financial sector policies to enhance the sustainability of monetary stimulus and mitigate risks to financial stability. They highlighted the importance of clear communication of policy guidance to markets. Directors considered that the current monetary policy framework is working well under the circumstances, although there may be scope to explore possible options to strengthen the framework over time with a view to further improving policy flexibility and credibility.

Noting the challenges associated with prolonged low interest rates and rising demographic pressures, Directors stressed the need to proactively strengthen the resilience of the banking sector. They encouraged the authorities to consider tightening macroprudential policies and stand ready to activate the countercyclical capital buffer. They also recommended that efforts continue to further improve financial sector supervision and regulation, the risk assessment process, and the macroprudential policy toolkit. Directors were encouraged by progress made in implementing the 2017 FSAP recommendations. They welcomed the authorities’ close engagement with regional financial institutions to help them adapt their business models.

Directors welcomed the recent fiscal stimulus package and agreed that a broadly neutral fiscal stance is appropriate for the near term. They noted that a medium-term fiscal framework that is well specified and underpinned by realistic assumptions would help ensure fiscal sustainability, lower policy uncertainty, and increase investor and consumer confidence. Directors recommended consideration of options to further strengthen the redistribution effects of taxation, improve incentives to reduce energy use, and cushion the impact of the consumption tax rate increase on the most vulnerable. They also highlighted the need to reform healthcare and public social security programs to improve spending efficiency, pension sustainability, and intergenerational equity.

Directors welcomed the ambitious agenda of structural reforms aimed at supporting reflation, productivity, labor supply, and growth. They considered labor market reforms as a priority, particularly measures to improve the 2018 Work Style Reform and increase the participation of female, elderly, and foreign workers. Directors encouraged continued efforts to ease regulations on product and service sectors, deepen corporate governance reform, and facilitate alternative sources of financing for small- and medium-sized enterprises. They commended the authorities for promoting climate change awareness and advancing mitigation and adaptation policies.

Directors took note of the staff’s preliminary assessment that Japan’s 2019 external position is assessed to be broadly consistent with fundamentals and desirable policies. They noted that a medium-term fiscal consolidation plan and bolder structural reforms that support domestic demand are needed to maintain external balance. Directors also commended the Japanese authorities for their commitment to further advance multilateralism.

Directors welcomed progress in combating the supply side of transnational corruption and encouraged further steps to improve enforcement of foreign bribery cases.



Japan: Selected Economic Indicators, 2017–21

Nominal GDP: US$ 4,954 Billion (2018)

GDP per capita: US$ 39,166 (2018)

Population: 126 Million (2018)

Quota: SDR 30.8 billion (2018)

2017

2018

2019

2020

2021

Est.

Proj.

(In percent change)

Growth

Real GDP

2.2

0.3

1.0

0.7

0.5

Domestic demand

1.6

0.3

1.1

1.0

0.6

Private consumption

1.3

0.0

0.5

-0.1

0.6

Business investment

4.0

2.1

1.7

1.0

3.0

Residential investment

1.7

-6.7

2.4

-1.7

0.1

Government consumption

0.2

0.9

2.1

2.8

0.4

Public investment

0.5

0.3

2.7

5.5

-6.1

Stockbuilding

0.1

0.0

0.1

-0.1

0.0

Net exports

0.5

0.0

-0.2

-0.2

-0.2

Exports of goods and services

6.8

3.4

-1.8

-0.4

2.0

Imports of goods and services

3.4

3.4

-0.6

0.6

2.8

Output Gap

-0.3

-0.7

-0.3

-0.2

-0.3

(In annual average)

Inflation

Headline CPI

0.5

1.0

0.6

1.1

1.2

GDP deflator

-0.2

-0.1

0.6

1.0

0.5

(In percent of GDP)

Government

General government

Revenue

34.2

33.8

34.0

34.6

34.6

Expenditure

37.3

37.4

37.6

38.0

37.4

Overall Balance

-3.1

-3.6

-3.6

-3.5

-2.8

Primary balance

-2.7

-3.3

-3.4

-3.5

-2.9

Structural primary balance

-2.9

-3.1

-3.3

-3.4

-2.8

Public debt, gross

234.6

237.9

239.0

239.8

241.1

(In percent change, end-period)

Macro-financial

Base money

9.7

5.0

6.6

6.1

5.2

Broad money

3.5

2.4

2.8

2.0

2.2

Credit to the private sector

4.0

1.5

2.9

2.5

2.5

Non-financial corporate debt in percent of GDP

138.5

141.2

142.5

143.4

144.8

(In percent)

Interest rate

Overnight call rate, uncollateralized (end-period)

-0.1

-0.1

Three-month CD rate (annual average)

0.0

0.0

Official discount rate (end-period)

0.3

0.3

0.3

0.3

0.3

10-year JGB yield (e.o.p.)

0.1

0.1

-0.1

0.0

0.1

(In billions of USD)

Balance of payments

Current account balance

202.0

175.3

170.4

180.6

184.8

Percent of GDP

4.1

3.5

3.3

3.4

3.4

Trade balance

44.1

11.6

2.5

-4.3

-10.1

Percent of GDP

0.9

0.2

0.0

-0.1

-0.2

Exports of goods, f.o.b.

688.9

735.9

701.3

681.5

693.5

Imports of goods, f.o.b.

644.9

724.3

698.7

685.9

703.6

Energy imports

117.8

148.5

130.7

124.1

117.3

(In percent of GDP)

FDI, net

3.2

2.7

2.8

2.9

2.9

Portfolio Investment

-1.0

1.8

1.4

1.2

1.1

(In billions of USD)

Change in reserves

23.6

24.0

11.0

11.5

11.5

Total reserves minus gold (in billions of US$)

1232.4

1239.4

(In annual average)

Exchange rates

Yen/dollar rate

112.2

110.4

Yen/euro rate

126.7

130.5

Real effective exchange rate (ULC-based, 2010=100)

78.7

77.6

Real effective exchange rate (CPI-based, 2010=100)

75.0

74.4

(In percent)

Demographic Indicators

Population Growth

-0.2

-0.2

-0.2

-0.3

-0.4

Old-age dependency

46.0

46.9

47.6

48.4

49.0

Sources: Haver Analytics; OECD; Japanese authorities; and IMF staff estimates and projections.



[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://0-www.imf.org.library.svsu.edu/external/np/sec/misc/qualifiers.htm .

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