Press Release No. 10/200

Press Release No. 10/200
May 19, 2010

An International Monetary Fund (IMF) team, led by Mr. James Gordon, Senior Advisor in the Asia and Pacific Department, visited Tokyo during May 10-19 to conduct the annual Article IV discussions with Japan. The team met with senior officials from the government, the Bank of Japan (BoJ), and private sector representatives to discuss recent economic developments and the policy challenges ahead. The IMF's First Deputy Managing Director, Mr. John Lipsky, joined the mission for the final policy discussions.

At the conclusion of the visit, the mission issued the following statement:

“Japan’s recovery is gaining strength. Decisive policy action and strong external demand are driving the recovery, with GDP expected to grow by around 2 percent in both 2010 and 2011, and inflation to turn positive in late 2011.¹ Private consumption will likely pick up while robust exports, particularly from Asia, lift business investment. However, the pace of recovery is expected to moderate once stimulus measures expire and export growth slows.

“With global scrutiny of public finances increasing, the need for early and credible fiscal adjustment has become critical. The fiscal response to last year’s recession was necessary and effective, but has pushed public debt to unprecedented levels. The government has rightly recognized the need for fiscal adjustment and is preparing a new “Fiscal Strategy” to be released in June. In our view, fiscal adjustment should start in FY2011, beginning with a gradual increase in the consumption tax, to take advantage of the cyclical recovery. Stabilizing the public debt ratio and placing it on a downward path will also require measures to contain the growth in spending. Adopting a fiscal rule based on a primary balance target and debt limit would strengthen the commitment to fiscal consolidation.

“The BoJ’s current accommodative policy stance has helped stabilize financial markets and support the recovery. To close the output gap and combat deflation, consideration could be given to additional easing measures, such as by extending the maturity of the BoJ’s fund-supplying operations. We also look forward to possible proposals by the BoJ to support private lending to firms in new growth areas.

“Financial policies should aim to strengthen the resilience of the financial system. Japanese banks have so far been largely unaffected by events in Europe, but a further deterioration could lead to difficulties. In this regard, the re-establishment of the US$ swap facilities between the BoJ and the U.S. Federal Reserve provides a useful backstop. Japanese banks face a number of challenges in meeting the new global regulatory standards and boosting core profitability in an uncertain environment. At the same time, they face interest rate risks from their large holdings of government bonds. The priority should be to strengthen banks’ capital and profitability and ensure proper risk management, while encouraging the restructuring of distressed borrowers.

“An ambitious pro-growth agenda would help support fiscal adjustment and allow Japan to capitalize on faster growth in the region. We look forward to the government’s growth strategy in June which aims to promote growth in areas such as the environment, health, and technology. In addition, policies to foster start-ups, boost employment, and raise competition would assist in raising Japan’s long-term growth prospects.”

---

¹ These figures are from the IMF’s April 2010 World Economic Outlook. The mission will update its growth projections prior to the Article IV Board meeting in July on the basis of the 2010 Q1 GDP data release and other indicators.