Abenomics Approaching Its One-Year Mark
Opening Remarks for IMF Seminar by Anoop Singh
Director, Asia and Pacific Department, International Monetary Fund
Tokyo, October 29, 2013
As Prepared for DeliveryGood morning. It is my great pleasure to be back in Tokyo and to open today’s seminar on “Abenomics Approaching Its One-Year Mark”.
Almost one year has now passed since the inception of the so called “three arrows” of Abenomics approach, comprising aggressive monetary policy, flexible fiscal policies, and growth reforms, and this seminar provides a timely opportunity to take stock of progress with the implementation of this policy agenda.
The policy actions taken so far—including monetary and fiscal stimulus, and the decision to participate in TPP negotiations—have put Japan at the center of the global economic map. We have seen significant capital inflows into Japanese bonds and equity markets, mainly driven by foreign investors. “Abenomics” has become a buzzword all over the world, and the IMF is often asked whether the Japanese authorities will really be able to deliver what they have promised.
As we have stressed in this year’s Article IV Report, we at the IMF believe that the new policy framework provides a unique opportunity for Japan to end decades-long deflation and sluggish growth, and reverse the rise of public debt.
Japan has already made progress in this direction. Here, I would like to list a few achievements:
- The economy grew strongly in the first half of this year, driven by sizeable stimulus spending, robust private consumption and a rise in exports.
- Headline inflation rose substantially in recent months, and several indicators also point to an in increase in long-term inflation expectations.
- The decision to go ahead with the consumption tax increase is an important first step to ensure fiscal sustainability.
- Japan’s FDIs and bank lending to many Asian countries increased significantly, helping counteract concerns about Fed tapering and related capital outflows.
Please allow me to lay out some of the key challenges going forward.
In the near term, the challenge will be to achieve a successful transition to the next phase of Abenomics, which should be characterized by self-sustained, private demand-led growth, and by a steady increase in inflation.
Over the medium term, Japan will need to achieve higher growth, which is essential to ensure fiscal sustainability and lower public debt.
In meeting these goals, I see important trade-offs that now have come to the fore, including:
- How to proceed with fiscal reforms? Given Japan’s extremely high public debt-to-GDP ratio, fiscal consolidation is necessary, but the reduction in household disposable income, which will be associated with higher taxes and reduced public transfers, will pose risks to the necessary transition to private demand-led growth. Finding the right balance also by making fiscal reform as growth friendly as possible will be key.
- How to raise wage and investment growth? We all know that in normal circumstances wages should be determined by the interaction of labor supply and demand. In the current juncture, however, a nominal increase in wage is essential to exit deflation. Against this background, we should consider whether there is scope in Japan for policies aimed at encouraging wage growth, what form could these policies take, and what risks they pose, for example in terms of higher unemployment. Similarly, corporate income tax cuts to encourage investment are currently being debated. We should think about the costs and benefit of such measures, weighing their positive growth impact against their fiscal costs.
- How to assess progress with achieving higher inflation? Given current efforts to raise inflation above historical levels, no benchmarks for tracking progress exist. The BoJ will need to continue to sail in these uncharted waters, while at the same time starting to plan early to address exit risks.
- Which growth enhancing structural reforms should be prioritized? Several possible measures have been discussed in our reports and in the policy debate in Tokyo, including labor market reform, deregulation in key sectors, financial sector reform, encouraging female labor participation, and relaxing immigration requirements. While structural reforms are essential to complement monetary and fiscal policies and increase medium-term growth, measures that raise supply could increase deflationary pressures in the short term.
I look forward to hear the insights of our distinguished panel participants. In particular, in light of the above discussion, I think that the panel should discuss the following questions:
- First, to what extent has Abenomics being working according to expectations?
- Second, which concrete measures should the government’s growth strategy prioritize?
- Third, how can Japan’s public debt be stabilized in a growth-friendly way?
- Finally, what are the challenges related to the implementation of QQME?
Thank you very much, and I look forward to what promises to be an interesting exchange of ideas.