Transcript of IMF Press Conference at the Conclusion of the 2013 Article IV Consultation Discussion with Japan

June 14, 2013

May 31, 2013
Tokyo, Japan

David Lipton, First Deputy Managing Director

Webcast of the press briefing Webcast

Good afternoon everyone. It is a pleasure for me to visit again Tokyo in my capacity as the First Deputy Managing Director of the IMF. I want to start by expressing our appreciation to the Japanese authorities and all of those with whom we met here in Tokyo for their warm hospitality and for the cooperation that we had in the many discussions that the teams had here in the past weeks.

Yesterday, I had the privilege of meeting with Deputy Prime Minister and Minister of Finance Aso, with Minister of State for Economic Revitalization Amari, with Financial Services Agency Commissioner Hatanaka, and with Bank of Japan Governor Kuroda. I have also met with other senior Japanese officials over the past two days. The purpose of our visit here was to conclude our annual economic dialogue with Japan, what we call our “Article IV consultation.”

Let me go through the key findings of our discussions.

The Japanese authorities have embarked on an ambitious agenda to raise growth and exit deflation and bring the public finances into control. The new policy framework, the “three arrows of Abenomics,” provides a unique opportunity to end decades-long deflation and sluggish growth, and reverse the rise of public debt.

The new policies have gotten off to a very promising start. Growth rebounded strongly in the first quarter and we project growth to reach 1.6 percent in 2013. The recovery is expected to be sustained in 2014 at 1.4 percent helped by a pickup in private demand and monetary easing despite the rise of the consumption tax increase expected next year. Various indicators suggest that inflation expectations too are gradually picking up, albeit still well below the inflation target.

But the work of Abenomics has only just begun. The government growth strategies and fiscal reforms to be outlined in the coming months are essential for the strategy to be successful. Ambitious growth strategies are essential to generate a sustained rise of private investment, productivity, and wage growth. Only then will inflation pick up swiftly and sustainably. Equally important are concrete medium-term fiscal reforms to contain risks of a sharp rise in risk premium on government bonds at some point in the future.

Let me discuss our conclusions on the various policy areas – monetary, fiscal, structural and financial sector.

We fully endorse the BoJ’s objective to raise inflation to 2 percent and the sweeping enhancements to its monetary policy framework. By setting a clear timeframe of achieving 2 percent inflation underpinned by a doubling of the monetary base through a large-scale expansion of asset purchases, the BoJ has taken the key first step in raising growth and inflation.

We continue to be concerned about Japan’s fiscal position. Fiscal risks have risen as additional stimulus and social security spending have added to public debt. We estimate that over the next decade, structural fiscal consolidation of 11 percent of GDP will be needed to put the debt-to-GDP ratio firmly on a declining path.

A credible medium-term fiscal plan should be adopted as soon as possible. Raising the consumption tax rate as planned to 10 percent by 2015 is an essential step. What we would like to emphasize is that the introduction of multiple rates should be avoided. However, together with waning stimulus and reconstruction spending, this only contributes half of the needed adjustment. The remaining 5 and a half percent of GDP of adjustment should be achieved in the coming years through a mix of expenditure and revenue measures.

The emphasis of the consolidation measures should be to be growth friendly. Because the consumption tax is the most efficient revenue source, we propose further gradual increases in the years after 2015 to at least 15 percent. Another example is eliminating the income tax deduction for spousal dependents that would raise revenue, while making full-time employment more attractive.

The government’s growth strategy should build on steps already taken towards reviving Japan’s economic dynamism. The government’s participation in the Trans-Pacific Partnership negotiations and its plans to raise the employment of women are welcome steps, but we see an urgent need to broaden these efforts.

Further concrete measures should include deregulation in agriculture and domestic services, providing more risk capital to the business sector, reducing Japan’s excessive labor market duality, and further relaxing entry requirements for skilled foreign workers.

A complete package of reforms would also further strengthen financial sector stability in Japan. It can reduce banks’ JGBs holdings and create lending opportunities at home and abroad. However, new challenges could also arise, particularly for regional banks if fiscal and growth reforms disappoint.

On exchange rate stability, the recent large depreciation of the exchange rate must be understood in the context of the critical and welcome effort of the BoJ to decisively exit from deflation. Compared to the average level in 2012, the yen had depreciated by about 20 percent in real effective terms by April 2013 as a result of aggressive monetary easing, higher energy imports, reduced safe-haven effects, and the expected widening of interest rate differentials with the U.S., leaving the yen moderately below what would be consistent with medium-term fundamentals. So long as monetary easing pursues domestic goals, and is accompanied by comprehensive fiscal and structural reforms, we do not see the yen’s current depreciation as problematic. Over the medium-term, once a complete set of reforms, all three arrows, are in place, the expectation is that the exchange rate and current account balance would move to levels broadly consistent with fundamentals.

Finally, the reforms in Japan will likely have a global dimension as well. Although the short-run implications could be more mixed, for example on direct competitors, overall, our work suggests positive economic spillovers from Abenomics. That is, as long as all three arrows are launched successfully, higher growth in Japan and easier global financial conditions would more than offset any short-term negative spillover effects.

Let me end by thanking again the Japanese authorities for their excellent cooperation and warm hospitality. I would be happy to entertain questions from you.

QUESTION: You lay out a very ambitious agenda of reforms that are required in Japan. Obviously these are going to take some considerable time to implement. Given that the monetary easing by BoJ takes effect as of now, do you think there is a risk that the impact of the monetary measures will wear off before the longer-term reforms take effect, and therefore, discredit the impact of the reforms? If so, is it likely that a liquidity trap develops in Japan or asset prices rise disproportionately because there is a tremendous gap between the short- and long-term measures? And just very briefly on the Concluding Statement, you say that deteriorating fiscal conditions could have a substantial impact on long-term bond yields. I assume you don’t think that is what is happening at the moment. I have seen bond yields rising, but that is a different matter, is it?

MR. LIPTON: Thank you. Those are good questions. Japan has been in a deflationary trap for many years, for more than a decade. I think what Abenomics has launched is the best chance yet for escaping that trap. The monetary policy measures that have been taken are forceful and the commitments that have been made are stronger than they have been made in the past. We certainly believe that its best chance for success comes from firing the other two arrows of Abenomics and doing so as soon as possible. I think that on your question, the monetary policy arrow alone can have some important and even sustained benefits by raising inflation expectations, lowering real interest rates, raising asset prices as we have seen – all of those things can encourage increases in spending. But it is very important that the other adjustments begin, and in particular, that the third arrow, the structural measures to promote growth, are made very clear when the political timetable here permits.

On your second point, as you suggest, our concern is that if the second and third arrows of Abenomics are not taken care of, if there is not a commitment to create growth and to bring the medium-term budget under control, then doubts could rise about medium-term public finance but that is not our baseline. That would be our sense of one of the downside risks.

QUESTION: Thank you for your very encouraging comments. I would like to raise one simple question concerning market volatility. There can be some side effect of quantitative monetary policy to the market, i.e., increased market volatility. We have seen big volatility in equity as well as in the bond market in Japan. How do you assess the risk of the side effect of monetary policy?

MR. LIPTON: I think as Japan goes from a situation of steady and non-volatile deflation to try to overcome that deflation with forceful monetary easing, it is inevitable that there will be some volatility. The volatility comes from the actions that have been taken, but also from the fact that the markets have to digest these measures, understand their quantity, understand their impact, and revalue the many assets in the economy. So I think it is understandable that there would be some volatility. I think the central bank has taken this into account and has refined the manner in which it carries out its qualitative and quantitative monetary easing measures. I think there is good reason to expect that volatility will become manageable, but there is bound to be some volatility in the course of such significant changes in financial policy.

QUESTION: Apart from BoJ, most private sector economists do not believe the two year 2 percent inflation target is achievable because the potential growth rate is 0.5 percent. What is your view on this?

MR. LIPTON: Time will tell exactly how quickly inflation expectations adjust in the economy. It is true as you suggest that interest rates will also adjust as people adjust their expectations because people will, when they borrow, when they lend, want to incorporate expected inflation into those calculations. Our assessment is that BoJ stands a chance of achieving this goal. We would not be sure whether it would come a little earlier, on time, or a little later than the goal that has been set, but we think that with forceful implementation of the policy, backed up by the other arrows of Abenomics, the country stands for the first time in a very long time a chance of overcoming deflation and meeting the target.

QUESTION: Did you meet anybody from BoJ during your visit? My other question is, you mentioned an exit plan by BoJ. They have not mentioned anything about it. How soon do you think they should say something about how to get out of the massive JGB purchases? Also, one of the board members mentioned recently that regarding the 2 percent inflation target for the medium- to longer-term, they should allow for some deviation or a range. He did not give us any numbers, but what do you think about that?

MR. LIPTON: Thank you. I met with Governor Kuroda and his team. Members of my team met with a range of people at BoJ over the last two weeks and had extensive discussions about the issues in the area of monetary and financial policy. I think it is premature for there to be a discussion of the exit plan when they are really in the phase of the entry plan. There is a lot of work going on on the subject of exit from unconventional monetary policies by the Fed in the U.S. and by other central banks that have been going through this and who are at a more advanced stage in the use of unconventional monetary policy. Those efforts are bound to be useful and helpful to BoJ when it comes time to explore exit. But I think right now the focus of policy, appropriately, is on the application of this new policy and the accomplishment of the goal that has been set. The question of whether the goal should eventually be changed is also something for the future. When you are in the range of deflation and you are trying to get to 2 percent, the key thing to do is to head in the right direction. In essence, the key is to take off and fly in the right direction. Whether you land exactly at 2 percent or little above or little below 2 percent, whether you have a range, is a subject that can be considered appropriately in the future.

QUESTION: Both the Japanese government and BoJ have eased significantly the policies, but deflation is very difficult to get rid of. The rate is yet to rise. It seems there are a lot of challenges ahead. Of course the Government and BoJ are doing their best, but what if their initiatives – significant fiscal and monetary stimulus – fail? What negative implications could this failure have on Japanese public finance?

MR. LIPTON: The question is a good one. There is never certainty in policymaking, but BoJ policy is I think the best approach to try to overcome the problem of deflation. There are no guarantees. There is clearly no immediate overnight success. But already one sees inflation expectations beginning to change. What is important and I think what is distinctive about this round of policymaking is the strength of the policy and the breadth of the commitment to a specific number, on a specific date, and to do what is necessary to get to that goal. It may take some time for the policy to take effect, to affect prices, to affect wages. One really does have to affect the perceptions of businesses, of workers who are engaged in wage negotiations, of consumers, of people who borrow, and of people who lend. You are right, that can take time. Of course if the policy is less successful, it brings greater risk that there will be more attention to high deficits and debt. For that reason, it really is important that the policy of the first arrow be accompanied by a fiscal approach that makes clear as soon as possible the approach that will be taken to bring the budget deficit down, stop the rise of public debt, so that people can see the pathway to fiscal sustainability as well as the pathway from deflation to 2 percent inflation.

QUESTION: On IMF’s quota and governance reforms, the U.S. has yet to pass this at Congress. Unless there is clearance in the U.S., it will not make progress and that may have a negative impact on the reputation of IMF. What is the prospect of the reform going forward? How should you address this?

MR. LIPTON: Thank you. The Obama Administration has submitted a request to Congress for passage of the quota and governance reforms. They assure us that they are working hard in order to secure that passage. We at the IMF from time to time are asked by U.S. Senators and Congressmen for information about the IMF so that they have the information they need to make this decision. We are encouraged that both the administration and Congress are engaged on this subject and hope that there will be passage soon. In any event, IMF and all of our member countries are committed to continue to update the quotas and the governance of IMF to keep up with the changes in the global economy. Countries that are fast growing are gaining in economic importance in the world, and we need to have their position at the IMF adjust according to the changes in their economic importance. I am quite confident that as time goes on that will happen and IMF will remain an institution that represents its members fairly.

QUESTION: According to your report, it seems that on the question of whether the Japanese economy will revive or not, the criticality rests with the growth strategy of Japan. In two weeks time, the government is slated to announce its growth strategy. Given the upcoming upper house election, some argue that the planned strategy may be less bold than what one would expect from the growth strategy. What is the degree of expectation of IMF?

MR. LIPTON: We have had very good discussions with Japanese authorities about this subject during the course of our visit. We understand that the political timetable here dictates a two-step approach, that in June there will be a presentation of the broad approaches to structural reforms to promote growth and the presentation of more detailed approaches will come following the summer elections, and that a lot of work is being done in preparation of both parts. I think that in the course of the next several months, the government will have an opportunity to say what intends and the Japanese people will have a chance to understand the strategy that is being put together.

QUESTION: You made a comment about the exchange rate. I am not sure if I understood or misunderstood. You seem to be saying that the yen was moderately undervalued, suggesting that over time this would correct. Perhaps I got that wrong. So perhaps you can clarify that? And very quickly, can you say a bit more about how you see the spillover effects of Japan’s easing, especially on the rest of Asia at a time when the U.S. is talking about monetary tightening? Could it be that the U.S. would be tightening and Japan would be loosening and the two would offset each other?

MR. LIPTON: On external stability, as I said, I think it’s very important to understand and appreciate the changes that we have seen in both the external current account and exchange rate in the context of both the global situation and the very extraordinary effort that is being made, the Abenomics strategy. Clearly the first arrow of Abenomics – the quantitative and qualitative monetary easing – is an attempt to overcome deflation as we have just been discussing. We appreciate that that has had an effect on the exchange rate. Yes, our assessment is that right now that leaves the exchange rate moderately below what would be consistent with medium-term norms. But our judgment is that given the full Abenomics plan, that if all three arrows are shot and successfully hit their targets, that the country begins to overcome deflation, restore growth and improve the fiscal accounts, we would expect to see the external balances, the real exchange rate, adjust in appropriate fashion.

On the spillovers, these policies as we have said are policies that are being carried out for domestic objectives but are bound to have and are having some effects on the rest of the world. When we look at the subject, we are not seeing capital outflows from Japan. Clearly the exchange rate has moved, and that affects some countries more than others. Countries that are competitors with Japan from the standpoint of the supply of products have seen their competitiveness affected. But we are not seeing very pronounced effects and certainly not seeing capital outflows or the impact of increasing liquidity affecting global markets significantly. It is a subject that we will monitor. But again, we consider that provided that the three arrows of Abenomics are all successfully implemented, the restoration of growth, an appropriate inflation, and the control of the fiscal situation in Japan would bring such significant economic improvements in Japan that the spillovers to the rest of the world from that would be strong enough to offset any negative effects that may be happening right now in the short-run.

Thank you all for coming.


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