IMF Executive Board Concludes 2014 Article IV Consultation with Japan

Press Release No. 14/374
July 30, 2014

On July 23, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Japan.

Japan’s economy is expected to grow above potential this year (1.6 percent), buoyed by strong business investment and last-minute consumer spending ahead of the consumption tax increase in April. Once the effects of the tax increase are removed, underlying inflation is projected at slightly above 1 percent this year. Price increases are still largely related to the yen depreciation of early 2013 but have now spread to non-tradable goods. The financial sector remains stable, with portfolio rebalancing away from Japanese government bonds.

Over the medium term, growth is projected to stabilize around 1 percent benefiting from improvements in productivity and capital formation (in response to 3rd arrow initiatives) while the diminishing labor force pulls in the opposite direction. Inflation is expected to reach the 2 percent target in 2016–17, with the closing of the output gap and rising inflation expectations providing momentum for price increases.

Risks over the medium-term are tilted to the downside. If Abenomics does not deliver on its reform promises, growth expectations could falter and concerns about the health of public finances could rise.

Structural reforms that go beyond the announced June update to the growth strategy, along with a concrete medium-term fiscal consolidation plan, are essential for lifting growth expectations and instilling confidence in the path of public finances. Additional steps to raise potential growth include lifting the labor supply, reducing labor market duality, enhancing the provision of risk capital, and further deregulating agriculture and services. The second stage increase in the consumption tax to 10 percent should go ahead as planned in October 2015 but will not in itself be enough to put the sovereign debt-to-GDP ratio on a declining path.

With inflation and inflation expectations both on the rise, monetary policy should maintain its current stance while clarifying the indicators used to track progress toward the 2 percent target. Should growth weaken, or inflation and inflation expectations reverse course, the Bank of Japan (BoJ) will need to act swiftly to scale up asset purchases and alter their composition toward riskier assets. The effectiveness of additional easing by the BoJ, however, depends on fully launching the fiscal and growth arrows, without which monetary policy may become overburdened, the yen may weaken unduly, and financial instability risks may emerge.

Executive Board Assessment[2]

Executive Directors noted that the underlying momentum in Japan’s economy remains solid, with growth expected above potential, and welcomed the improved short-term outlook. Directors concurred, however, that significant downside risks remain in the medium term, including those arising from fiscal vulnerabilities. Directors agreed that the best way to minimize these risks is the steadfast implementation of all the elements of the government’s economic strategy which, by strengthening domestic prospects, would create benefits for the global economy as well.

Directors agreed that transitioning to a private-demand led recovery and durably exiting from deflation and low growth requires bold structural reforms to lift labor supply, reduce labor market duality, enhance risk capital provision, and deregulate agriculture and services. They welcomed the recent revision of the Japan Revitalization Strategy and looked forward to its rapid implementation. Directors commended the authorities for the steps already taken in several areas, including corporate governance reforms, which could help firms deploy their large cash balances more productively. They suggested, however, renewed efforts in other areas where progress has been slower, including labor market reform.

Directors emphasized that a concrete medium-term fiscal plan beyond 2015 is needed to build confidence in the path of public finances and limit fiscal risks. They noted the significant effort required to stabilize the debt to GDP ratio over the medium term and encouraged the authorities to strike the right balance between fostering fiscal adjustment and supporting growth. In this regard, Directors concurred that the planned cut in the corporate tax rate could lift investment, but is not self-financing and should therefore proceed only in combination with measures to offset revenue losses.

Directors agreed that, with inflation on a generally rising trend and the output gap closing, no further monetary easing is needed at this stage. However, if downside risks to the inflation outlook materialize, the Bank of Japan will need to act swiftly through additional or longer-dated asset purchases while taking into account financial risks. In this context, Directors encouraged the Bank of Japan to consider ways to further strengthen its communications on the future direction of policy. More broadly, Directors agreed that prolonged monetary easing without complementary fiscal and structural reforms could put an excessive burden on monetary policy and pose new risks.

Directors noted that the financial sector remains stable and well capitalized. They welcomed the portfolio rebalancing underway, which is providing more risk capital and is supporting growth. Directors noted, however, that investors’ search for yield could also create vulnerabilities, including with regard to overseas lending. Accordingly, they encouraged the authorities to continue to monitor developments proactively. Directors also encouraged the authorities to address the remaining gaps in their framework against money laundering and terrorism financing.

Directors took note of the staff assessment that Japan’s external position is broadly in line with medium-term fundamentals and desirable policies. They agreed, nonetheless, that this assessment is subject to a high degree of uncertainty owing to the interplay of temporary and structural factors, including the off-shoring of production and the increase in energy imports since the 2011 earthquake.

Selected Economic Indicators, 2009–15

Nominal GDP: US$ 4,900 billion (2013)

Population: 127 million (2013)

GDP per capita: US$ 38,478 (2013)

Quota: SDR 15.6 billion (2013)

  2009 2010 2011 2012 2013 2014 2015

Growth (percent change) 1/


Real GDP

-5.5 4.7 -0.5 1.4 1.5 1.6 1.1

Domestic demand

-4.0 2.9 0.4 2.3 1.8 1.8 0.8

Private consumption

-0.7 2.8 0.3 2.0 2.0 0.7 0.7

Gross Private Fixed Investment

-14.7 -0.5 4.3 3.5 0.3 6.7 3.9

Government consumption

2.3 1.9 1.2 1.7 2.0 1.2 0.5

Public investment

7.0 0.7 -8.2 2.8 11.4 3.9 -9.6

Stockbuilding 2/

-1.5 0.9 -0.2 0.1 -0.3 -0.2 0.0

Net exports 2/

-2.0 2.0 -0.8 -0.7 -0.2 0.0 0.2

Exports of goods and services 3/

-24.2 24.4 -0.4 -0.1 1.7 7.2 3.5

Imports of goods and services 3/

-15.7 11.1 5.9 5.3 3.4 8.2 2.8

Inflation (annual average)


CPI 4/

-1.3 -0.7 -0.3 0.0 0.4 2.8 2.1

GDP deflator

-0.5 -2.2 -1.9 -0.9 -0.6 1.4 1.6

Unemployment rate (annual average)

5.1 5.0 4.6 4.3 4.0 3.9 3.9

Government (percent of GDP)


General government



29.6 29.6 30.8 31.2 31.7 33.0 33.8


40.0 38.9 40.6 39.9 40.0 40.0 39.7

Overall Balance

-10.4 -9.3 -9.8 -8.7 -8.3 -7.0 -5.9

Primary Balance

-9.9 -8.6 -9.0 -7.8 -7.6 -6.3 -5.0

Public debt, gross

210.2 216.0 229.8 237.3 243.4 243.2 242.7

Money and credit (percent change, end-period)


Base money

5.8 4.8 15.2 7.0 34.4

M2 (period average)

2.7 2.8 2.7 2.5 3.6

Domestic credit

1.3 1.2 0.6 3.5 4.7

Bank lending

-0.9 -1.8 0.7 1.3 2.2

Interest rate


Overnight call rate, uncollateralized (end-period)

0.09 0.08 0.08 0.08 0.07

Three-month CD rate (annual average)

0.3 0.3 0.3 0.3 0.2

Official discount rate (end-period)

0.3 0.3 0.3 0.3 0.3

Balance of payments (in billions of US$)


Current account balance

145.3 217.5 127.0 58.7 33.1 59.9 63.9

Percent of GDP

2.9 4.0 2.1 1.0 0.7 1.2 1.3

Trade balance

57.6 108.4 -4.1 -53.5 -89.9 -63.1 -59.5

Percent of GDP

1.1 2.0 -0.1 -0.9 -1.8 -1.3 -1.2

Exports of goods, f.o.b.

546.3 733.6 789.0 776.5 695.0 715.8 766.1

Imports of goods, f.o.b.

-488.8 -625.1 -793.1 -830.0 -784.9 -778.9 -825.6

Oil imports (trade basis)

99.9 134.3 182.5 196.9 184.9 192.4 191.4

FDI, net (percent of GDP)

1.2 1.3 2.0 2.0 2.7 2.2 2.2

Terms of trade (percent change)

19.5 -3.3 -7.5 0.8 -2.9 1.8 -2.3

Change in reserves

27.0 43.2 172.8 -38.2 39.5 -4.5 -7.2

Total reserves minus gold (in billions of US$)

1,022.2 1,061.5 1,258.2 1,227.2 1237.3

Exchange rates (annual average)


Yen/dollar rate

93.6 87.8 79.8 79.8 97.6

Yen/euro rate

130.3 116.5 111.0 102.6 129.6

Real effective exchange rate (ULC – based) 5/

108.2 109.8 118.5 119.7 96.7

Real effective exchange rate (CPI-based)

98.9 100.0 101.7 100.3 80.1

Sources: Global Insight, Nomura database; IMF, Competitiveness Indicators System; and IMF staff estimates and projections as of June 20, 2014.

1/ Annual growth rates and contributions are calculated from seasonally adjusted data.

2/ Contribution to GDP growth.

3/ For 2014, export and import growth rates are inflated because of changes in the compilation of BoP statistics (BPM6) implying a break in the series

to previous years.

4/ Including the effect of consumption tax increases in 2014 and 2015.

5/ Based on normalized unit labor costs; 2005=100.

[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.

[2] 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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