Speech

Opening Remarks by First Deputy Managing Director Gita Gopinath at the Press Conference on the Conclusion of the 2024 Japan Article IV Consultation Mission

February 8, 2024

(As prepared for delivery)

Good afternoon. Thank you for joining us as we conclude the 2024 Article IV Mission for Japan.

Before we get into our findings, I want to recognize that 2024 began with a terrible tragedy here in Japan. On behalf of the IMF, our deepest sympathies are with those affected by the earthquake in the Noto Peninsula on January 1. We hope for healing and strength as you rebuild from this disaster.

I also want to thank the authorities, the Bank of Japan, and our partners in the private sector for their collaboration in this process. We appreciate your engagement with our team over the past few weeks here in Tokyo as we assess Japan’s economy.

To sum up our findings and recommendations, I will cover five topics.

The first is the economic outlook for Japan.

For decades, Japan has struggled to boost low inflation and weak domestic demand. Economists have strained to explain this phenomenon, and Japan has been a pioneer in developing new policy tools that have since been implemented around the world.

We now think this period is coming to an end. The output gap closed in mid-2023, meaning that demand is now aligned with the economy’s capacity. We project 1.0 percent growth in 2024, up slightly from our most recent World Economic Outlook Update thanks to stronger government spending. And achieving sustained 2-percent inflation looks increasingly likely.

Why? Because for the first time in three decades, price increases are now broad-based across goods and services. Wages are growing at their fastest pace since 1995, amid a tight labor market, and demand-side factors are playing an important role in driving inflation. Most households and firms now expect inflation to remain above 2 percent going forward.

Looking ahead, the impact of import prices on inflation will fade. But we expect a very strong labor market to drive faster nominal wages, which will keep core inflation above the two-percent target until the second half of 2025.

This outlook shapes our policy advice for Japan.

That brings me to the second topic: monetary policy.

Our view is that the BOJ has been appropriately cautious by keeping policy extremely accommodative, given Japan’s history of deflation and mixed signals from recent data.

Unconventional monetary policies have done their job of supporting the recovery and raising inflation expectations but are no longer needed to achieve the inflation target. That means the BoJ should exit from Yield Curve Control (YCC) and end the Quantitative and Qualitative Easing (QQE) framework, while continuing to rollover its maturing JGBs to avoid abrupt shifts in bond markets.

The BOJ should then gradually raise the policy interest rate over the next few years. These policy shifts should be gradual and well-communicated.

The third topic is fiscal policy. With a closed output gap and high public debt-to-GDP, fiscal policy should be meaningfully tighter.

In the longer term, the public debt-to-GDP ratio will increase steadily to accommodate age-related spending pressures. Fiscal consolidation is needed to rebuild fiscal buffers and ensure debt sustainability, underpinned by both revenue and expenditure measures. On the revenue side, there are several options, including for example, strengthening financial income taxation for high-income earners. On the expenditure side, this can be achieved by limiting untargeted transfers or by phasing out energy subsidies. Going forward, additional expenditure policies should be offset by higher sustainable revenues to pay for them.

Fourth, the financial sector. We also conducted an in-depth assessment of the financial sector’s resilience as part of our Financial Sector Assessment Program.

The stress test exercises suggest that the financial system is broadly resilient to a range of macro-financial shocks, including a potential rise in foreign and domestic interest rates and a sharp drop in global and domestic growth. But there are vulnerabilities, including from sizable securities holdings, foreign currency exposures, and signs of overheating in parts of the real estate markets. These require close monitoring and underscore the need to further strengthen the financial oversight and crisis preparedness frameworks.

Finally, structural reforms can help make the Japanese economy more dynamic, more green, and more inclusive.

This includes measures to empower women in the labor market, such as increased spending on childcare facilities and reforms to make working conditions more flexible.