IMF Executive Board Concludes 2011 Article IV Consultation with Japan

Public Information Notice (PIN) No. 11/90
July 19, 2011

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 2011 Article IV Consultation with Japan is also available.

On July 13, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Japan.1


The Great East Japan Earthquake and Tsunami on March 11, 2011 brought Japan’s nascent recovery to a halt. It destroyed large parts of the northeastern coastal areas and damaged key infrastructure. The destruction far exceeded those of the 1995 Great Hanshin earthquake near the city of Kobe and is likely to influence economic developments for some time.

Four months after the disaster, Japan’s economy shows signs of recovery. Recent data on household spending and production suggest a recovery in activity is underway, and supply chains are being restored faster than expected limiting spillovers to other countries. While the trade balance has weakened, the current account has remained in surplus given income derived from Japan’s large net foreign asset position. As of end June, equity markets have recouped two-thirds of their losses following the earthquake and ten-year Japanese government bond (JGB) yields have been stable at around 1.1–1.2 percent. After concerted intervention in coordination with the G-7 in mid-March, the Japanese Yen to the US dollar rate has traded in a band of 80-84 until early July.

The Japanese economy is set to expand later this year. After a sharp contraction in the first half of this year, supply conditions are expected to normalize this summer and reconstruction spending to pick up steadily. The recovery is forecast to continue in 2012 as the resumption of exports lifts domestic demand and reconstruction spending continues. As a result, GDP growth is expected to slow to -0.7 percent in 2011 before rising to 2.9 percent in 2012. Headline inflation is projected to be around zero percent in 2011 and 2012, while underlying inflation—excluding food and energy—will likely remain negative as a result of the still wide output gap. Uncertainty surrounding this outlook is large with the risks mainly on the downside. The key risks facing the recovery are from delays in restoring electricity capacity and a slow pick-up in private demand.

The fiscal costs of the earthquake could range between 2–4 percent of GDP spread over several years. Reconstruction is projected to increase the fiscal deficit in 2011 to 10½ percent of GDP and the net debt-to-GDP ratio to above 130 percent of GDP. In May, the government passed its first supplementary budget (0.8 percent of GDP) to repair damaged infrastructure, and the cabinet endorsed a second one in early July (0.4 percent of GDP) to continue reconstruction. An additional supplementary budget focused on revitalizing the region is expected later this year.

To support reconstruction and contain risks of deflation re-emerging, the Bank of Japan (BoJ) has further eased its accommodative policy stance by expanding the size of its asset purchase program to ¥10 trillion and through a new ¥1 trillion loan program to support lending activity of financial institutions in the affected regions. The BoJ also expanded its lending facility to “strengthen the foundations of economic growth” by ¥½ trillion to encourage asset-based lending by financial institutions. Financial sector policies helped maintain financial stability and ensured a smooth functioning of financial transactions in the affected regions.

Executive Board Assessment

Executive Directors commended the Japanese authorities for their swift policy response to stabilize markets following the devastating earthquake and tsunami. Directors noted that economic activity has recovered faster than expected, and the impact of the earthquake on global supply chains is expected to be short-lived. Nevertheless, the uncertainty surrounding the outlook is unusually large, with potential risks from delays in resolving power supply disruptions, and protracted weak demand and market sentiment. Against this backdrop, policy stimulus remains needed. At the same time, it is important to address longer-term issues through fiscal and broader structural reforms aimed at enhancing confidence in public finances and raising potential growth, while also minimizing risks of negative financial spillovers to other countries.

Directors stressed that the immediate priority for fiscal policy is to repair damaged infrastructure and facilitate a speedy recovery. They supported a sizeable, well-targeted supplementary budget that relies primarily on new tax measures, given limited room for further expenditure cuts and the need to limit government bond issuance. In this context, Directors welcomed the social security and tax reform plan, which includes a proposal to double the consumption tax rate by the mid-2010s. They noted that a more ambitious medium-term strategy, with a significant adjustment of the structural primary balance, is necessary to accelerate the pace of public debt reduction. This should comprise expenditure freezes and comprehensive tax reform, featuring a further gradual increase in consumption tax. Adopting a fiscal rule while allowing for some flexibility could help to enhance the credibility of the government’s strategy in this regard.

Directors supported the broadening of the Bank of Japan (BoJ)’s toolkit under its comprehensive monetary easing policy to combat deflation. They welcomed the authorities’ readiness to take additional easing measures as warranted. Should deflationary pressures emerge, consideration could be given to increasing purchases of longer-maturity public securities, and possibly private assets, under the BoJ’s asset purchase program, while paying due regard to their implications for financial market stability and the BoJ’s balance sheets. There is also some scope for further improving monetary policy communication to the public.

Directors agreed that the exchange rate should be determined by the markets, reflecting underlying economic fundamentals. They noted the need to avoid excessive volatility and disorderly movements in the exchange rate, which have adverse implications for economic and financial stability.

Directors commended the swift, decisive policy action to protect the financial sector from the initial shock of the earthquake. Noting potential risks of an economic slowdown and increased market volatility, Directors considered it important that banks maintain adequate capital and shift to more risk-based lending. They also encouraged a gradual withdrawal of special measures that had been put in place to facilitate loans to small- and medium-sized enterprises (SMEs) as conditions permit.

On spillovers, Directors welcomed the initiative. They remarked that such analysis needs to be further developed, and noted that, although policy spillovers from Japan on the global economy have been relatively limited in recent years, Japan remains an important contributor to regional growth and stability. Directors considered that fiscal consolidation would free up domestic savings and help reduce the risk of a rise in government bond yields that could lead to higher interest rates elsewhere. Timely implementation of the new growth strategy—with its focus on boosting employment, raising productivity through regional integration, and promoting startups and restructuring of SMEs—would help contain any negative short-term effects of fiscal consolidation measures. Directors commended the Japanese authorities for their strong commitment to international cooperation and development aid.

Japan: Selected Economic Indicators





2007 2008 2009 2010 2011



Real GDP

2.4 -1.2 -6.3 4.0 -0.7


Private consumption

1.6 -0.7 -1.9 1.8 -1.2


Nonresidential investment

2.6 -1.4 -16.7 2.1 0.4


Residential investment

-9.6 -8.0 -14.0 -6.3 4.5


Public investment

-7.4 -8.6 10.4 -3.4 8.1


Government consumption

1.5 0.5 3.0 2.2 1.6


Stockbuilding (contribution to growth)

0.3 -0.2 -1.5 0.6 -0.1


Net exports (contribution to growth)

1.1 0.2 -1.5 1.8 -0.7


  Exports of goods and services

8.4 1.6 -23.9 23.9 0.9


  Imports of goods and services

1.6 0.4 -15.3 9.8 7.7



Inflation (period average)



GDP deflator

-0.7 -1.0 -0.4 -2.1 -1.1


CPI (SA) 1/

0.1 1.4 -1.3 -0.7 0.1


CPI (NSA) 1/

0.1 1.4 -1.4 -0.7 0.1





Unemployment rate (period average, percent)

3.9 4.0 5.1 5.1 4.9





Current account balance



Billions of U.S. dollars

211.0 157.1 141.8 195.9 144.7


Percent of GDP

4.8 3.2 2.8 3.6 2.5





General government balances (percent of GDP)



Overall balance

-2.4 -4.2 -10.3 -9.6 -10.5


Primary balance

-1.8 -3.3 -9.2 -8.5 -9.0


Structural balance 2/

-2.6 -3.7 -7.0 -7.7 -8.1





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



Base money

0.4 1.8 5.2 7.0 16.2


M2 (period average)

2.1 1.8 3.1 2.3 2.7


Bank lending 3/

0.8 4.6 -0.9 -1.8 -0.5





Exchange and interest rates (period average)



Yen/dollar rate

117.8 103.4 93.6 87.8 80.6


Yen/euro rate

161.4 152.1 130.3 116.5 114.5


Real effective exchange rate 4/

59.8 66.9 78.1 83.8 86.7


3-month CD rate

0.5 0.5 0.3 0.3 0.3


10-year government bond yield

1.7 1.5 1.4 1.2 1.1




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

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

2/ Excluding bank support.

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

4/ Based on normalized unit labor costs; 2000 = 100.

5/ May 2011.

6/ June 24, 2011.

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. An explanation of any qualifiers used in summings up can be found here:


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