IMF Executive Board Concludes 2009 Article IV Consultation with Japan

Public Information Notice (PIN) No. 09/82
July 15, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2009 Article IV Consultation with Japan is also available.

On July 6, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Japan.1


Although Japan was not at the center of the initial crisis, the collapse in external demand and financial spillovers have plunged the economy into a severe recession. After expanding robustly by 2.3 percent in 2007, GDP contracted by 0.7 percent last year. GDP fell by about 14 percent (seasonally adjusted annualized rate, SAAR) in both Q4 2008 and Q1 2009, led by a sharp decline in external demand for Japan’s manufacturing exports, although production data have recently stabilized. Core inflation, which on staff’s definition excludes both fuel and food prices, has turned negative. Meanwhile, the unemployment rate has jumped to 5.2 percent in May 2009.

Japan’s financial markets have stabilized from the after-shocks of the Lehman Brothers collapse last September, but some stresses persist. The Japanese stock market has rebounded since March, but remains about 40 percent below end-2007 levels. The yen has appreciated by about 20 percent in real effective terms since August 2008, supported by unwinding carry trades and narrowing interest rate differentials against key currencies. Bank lending rates have declined following Bank of Japan’s (BoJ) policy rate cuts, although falling inflation has pushed up real rates. Corporate bond spreads remain low for high-rated companies but have increased sharply for lower-rated firms.

The fiscal balance has sharply deteriorated after improving for several years. While fiscal stimulus spending combined with automatic stabilizers will give a timely and needed boost to growth, it carries a significant fiscal cost. With the overall fiscal deficit projected to widen to about 11½ percent of GDP in FY2009 (April-March), net debt is projected to reach 100 percent of GDP this year (220 percent of GDP in gross terms). The government has announced new medium-term targets in the FY2009 Basic Policies, including halving the primary deficit (excluding the social security fund) within 5 years and achieving primary balance within 10 years. The government has also committed to stabilizing the debt-to-GDP ratio by the mid-2010s and placing it on a downward path during the early 2020s.

Monetary policy has been accommodative. The BoJ reduced its policy rate from 50 to 10 basis points in late-2008. The BoJ also supported stability in financial markets through significant liquidity injections, broadening the range of accepted collateral, larger volume of JGB purchases, and U.S. dollar funds-supplying operations. In addition, the BoJ took steps to improve the availability of corporate financing, in particular, through unlimited funds-supplying operations against corporate debt collateral and outright purchases of high-quality commercial paper and corporate bonds. As a back-stop to the financial system, the BoJ has also resumed its purchases of banks’ stockholdings and offered to provide subordinated loans to banks to support their capital base.

Financial policies are focusing on strengthening the resilience of the financial system. The authorities have adopted further measures to bolster capital and promote lending, while providing regulatory forbearance on unrealized equity losses at regional banks subject to domestic standards. At the same time, they have expanded the government’s lending guarantee program to stabilize small- and medium-sized enterprise (SME) lending.

Despite recent tentative signs of stabilization at home and abroad, the outlook remains uncertain. Staff projects GDP to fall by 6 percent in 2009, before expanding by 1¾ percent in 2010. A sustained recovery will likely emerge during the course of 2010 but will hinge critically on improvement in overseas lending conditions and trade. Inflation is projected to remain negative until 2011. The current account surplus is expected to fall to 1½ percent of GDP in the short term, well below the levels typical earlier this decade. The risks to the outlook remain tilted to the downside, stemming from the rapidly deteriorating labor market, tight domestic financial conditions, and external uncertainties. On current policies, potential growth could fall from about 1¾ percent in 2007 to close to 1 percent over the medium term as investment rates decline due to tighter corporate financing and structural rigidities slow rebalancing of growth toward domestic sources.

Executive Board Assessment

While Japan was not at the initial epicenter of the global crisis, the ensuing collapse in external demand and financial spillovers have plunged the economy into a severe recession. Directors commended the authorities for their well-calibrated response, which is providing a much-needed boost to the economy. They expected a sustained recovery to take hold next year, in line with a pick up in global growth, with inflation in mildly negative territory during the slowdown. However, Directors emphasized that the outlook is exceptionally uncertain. Notwithstanding recent signs of stabilization, risks are tilted to the downside due to a deteriorating labor market, still-tight financial conditions, and lingering uncertainties about global growth.

In these circumstances, Directors recognized that Japan faces a distinct set of immediate and longer-term challenges. They agreed with the authorities that the focus of near-term policies should be to support growth and preserve financial stability. Once the economy recovers, attention will need to turn to implementing an exit strategy from the exceptional policy interventions necessitated by the crisis and to stepping up reforms for rebalancing growth. Determining the appropriate timing, speed, and conditions for unwinding support will be key.

Directors welcomed the support being provided by the fiscal stimulus packages, and emphasized the need for continued flexibility to address further downside risks. A longer or more severe recession could call for additional targeted and reversible measures next year. Noting the rapid rise in public debt and the aging population, Directors welcomed the authorities’ medium-term consolidation strategy to be implemented once the recovery takes hold. In addition to new targets aimed at placing the debt ratio firmly on a downward path and careful debt management, such a strategy will likely require expenditure cuts as well as comprehensive tax reform, including an increase in the consumption tax after the recovery takes hold.

On the monetary front, Directors commended the authorities for their wide-ranging actions, which have helped to stabilize financial markets and facilitate corporate financing. The accommodative stance was seen as appropriate given the significant output gap and deflationary pressures. Going forward, most Directors supported additional credit easing measures should downside risks materialize or financial stresses resurface, while minimizing risks to the Bank of Japan’s balance sheet. A few Directors suggested that clarifying the horizon over which inflation is expected to return toward the Bank of Japan’s understanding of price stability could anchor expectations. With regard to the medium-term, Directors noted that the Bank of Japan has sufficient instruments to facilitate an orderly exit, and that many of its credit easing measures are set to expire automatically. The challenge will be to assess the appropriate timing and to clearly communicate the exit strategy to guide expectations.

Directors supported the authorities’ commitment to a market-determined exchange rate. Following a sharp appreciation during the crisis, the yen appears in line with its longer-term equilibrium value according to IMF staff estimates.

Directors welcomed the steps taken to stabilize the financial system. The authorities should continue to strengthen the resilience of the system, notably by bolstering bank profitability and capital and reducing risks from their equity holdings. At the same time, promoting restructuring of viable but distressed firms could help the economy adjust to the downturn. Exit from financial and corporate sector interventions should be guided by the need to preserve financial stability, protect government solvency, and facilitate needed restructuring.

Over the medium-term, Directors encouraged the authorities to press ahead with structural reforms, including deregulating the agricultural and service sectors, enhancing product market flexibility, further developing financial markets, and encouraging inward foreign direct investment. While reform priorities are clear, their urgency has increased in the wake of the crisis. By rebalancing growth toward domestic demand, such reforms will help Japan adjust to structural shifts in the global economy. Directors also welcomed the recent steps to strengthen the social safety net.

Japan: Selected Economic Indicators



2005 2006 2007 2008 2009

Real GDP

1.9 2.0 2.3 -0.7 -6.0


Private consumption

1.3 1.5 0.7 0.6 -1.0


Nonresidential investment

9.2 2.3 5.7 -4.0 -21.4


Residential investment

-1.5 0.5 -9.7 -7.6 -5.2


Public investment

-10.1 -5.7 -7.3 -6.9 12.9


Public consumption

1.6 0.4 1.9 0.8 2.9


Stockbuilding (contribution to growth)

-0.1 0.2 0.3 -0.2 -0.2


Foreign balance (contribution to growth)

0.3 0.8 1.1 0.2 -2.9


Exports of goods and services

7.0 9.7 8.4 1.8 -29.3


Imports of goods and services

5.8 4.2 1.5 0.9 -16.2





GDP deflator

-1.2 -0.9 -0.7 -0.9 1.0


CPI (SA) 1/

-0.6 0.2 0.1 1.4 -1.1


CPI (NSA) 1/

-0.3 0.2 0.1 1.4 -1.1


Unemployment rate (period average, percent)

4.4 4.1 3.9 4.0 5.1





Current account balance



Billions of U.S. dollars

165.7 170.4 211.0 157.1 92.0


Percent of GDP

3.6 3.9 4.8 3.2 1.8





General government balances (percent of GDP, FY)



Balance including social security

-4.5 -3.4 -3.3 -6.7 -11.6


Balance excluding social security

-4.8 -3.4 -3.0 -5.5 -10.2


Structural balance 2/

-4.3 -3.3 -3.3 -5.2 -8.4


Money and credit (12-month growth rate; end period)



Base money

1.0 -20.0 0.4 1.8 6.4


M2 (period average)

1.9 0.7 2.1 1.8 2.5


Bank lending 4/

1.1 2.8 0.8 4.6 3.1


Exchange and interest rates (period average)



Yen/dollar rate

110.2 116.3 117.8 103.4 94.2


Yen/euro rate

137.3 146.0 161.4 152.1 131.2


Real effective exchange rate 6/

70.8 63.2 58.3 64.7 72.8


3-month CD rate

0.06 0.22 0.51 0.51 0.33


10-year government bond yield

1.39 1.74 1.68 1.49 1.30












Sources: Global Insight, Nomura database and IMF staff estimates and projections.

1/ Annual growth rates are calculated from annual averages of monthly data.

2/ Including social security, excluding bank support.

3/ June 2009.







4/ Data reflect the inclusion of foreign banks, foreign trusts banks and Shinkin banks in the monetary survey.

5/ July 8, 2009.







6/ Based on normalized unit labor costs; 2000 = 100. Figure for 2009 is as of May.


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. 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.


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