Press Statement

IMF team completes visit to conduct the 2004 Article IV consultation with Japan

May 21, 2004

Japanese (104 kb PDF file)

An IMF team, led by Mr. Daniel Citrin, Deputy Director of the IMF's Asia and Pacific Department, has concluded its visit to Tokyo in connection with the IMF's annual Article IV review of the Japanese economy. It has held constructive discussions with senior government and Bank of Japan officials and private sector representatives, which focused on recent developments and policy priorities for the period ahead.

There are encouraging signs that the economic recovery is broadening. Robust growth in the first quarter was supported by both external and private domestic demand. Deflationary pressures are easing, and financial market developments over the past year have been broadly consistent with improved investor sentiment. Although risks remain, particularly from external factors, growth could reach 4 percent in calendar year 2004 as a whole.

Looking forward, the main priority for economic policies is to secure a stronger and more durable recovery by addressing Japan's remaining challenges. This will require a continued supportive monetary policy, a reduction in fiscal imbalances over time, further corporate and financial sector restructuring, and continued structural reforms. The improved economic outlook provides an opportunity to pursue these objectives by broadening and strengthening current efforts.

The mission welcomes the Bank of Japan's commitment to maintain its quantitative easing policy as long as deflation persists. Going forward, as the onset of inflation draws nearer, the mission encourages the Bank of Japan to stabilize inflation expectations by clarifying its medium-term inflation objective.

Fiscal consolidation is needed over the medium term to prevent public debt from rising to levels that could push up real interest rates, hurting growth. The mission welcomes the official goal of achieving a primary surplus (excluding social security) by the early 2010s, and encourages the authorities to further elaborate their deficit reduction plan.

The financial condition of major banks has continued to improve, supported by rising equity prices, the economic recovery, and regulatory action. Continued efforts are needed to further reduce nonperforming loans and improve profitability and thereby place the banking system on a sound footing to facilitate corporate restructuring and support growth. A key priority is to strengthen the regional banks, whose restructuring has lagged.

Beyond the financial sector, increasing emphasis must be placed on structural reforms to help raise productivity and long term growth. The mission welcomes the authorities' commitment to such reforms. The main priorities should include the downsizing and rationalizing of Japan Post ahead of its privatization, further deregulation, and continued steps to improve labor market flexibility. Further trade liberalization will also be important. In this regard, the mission encourages the authorities to work with other countries to ensure success of the Doha Round.

The government's reform efforts of recent years are beginning to bear fruit, and significant progress has been made in strengthening the Japanese economy. Going forward, continued efforts to broaden these reforms would help to raise Japan's economic potential and create the conditions for sustained higher growth.