IMF team completes 2005 Article IV consultation mission with Japan
May 26, 2005
Japanese (223 kb PDF file)
An IMF team, led by Mr. Daniel Citrin, Deputy Director of the IMF's Asia and Pacific Department, has completed its visit to Tokyo to conduct the IMF's annual Article IV review of the Japanese economy. The team held wide-ranging discussions with senior government and Bank of Japan officials on recent economic developments and policy challenges.
Overall, the near term outlook suggests moderate growth, notwithstanding certain risks. While strong growth in the first quarter partly reflected temporary factors, underlying economic fundamentals are improving, with labor markets strengthening and corporate and bank restructuring continuing to advance. These trends should help support domestic demand, with GDP growth above 1½ percent in 2005 and 2006. Nevertheless, mild deflation persists.
Looking ahead, along with continued efforts to defeat deflation, the priority for economic policies is to reduce the vulnerabilities posed by low trend growth and growing fiscal imbalances in the context of an aging population. This will require broad reforms to strengthen the basis for self-sustained growth over the medium term. Such efforts would also contribute to continued growth in the world economy and an orderly resolution of global imbalances.
The immediate task for monetary policy remains to eliminate deflation. In this regard, the mission welcomes the Bank of Japan's commitment to maintaining a highly accommodative monetary stance, while taking steps to increase operational flexibility. Going forward, continued communication by the Bank of Japan of its policy intentions can help smooth the transition from deflation toward a new monetary framework.
Sustained fiscal consolidation is needed to arrest the ongoing rise in public debt and prepare for growing demographic pressures. The official goal of achieving a primary surplus (excluding social security) by the early 2010s is a useful starting point, and significant progress towards this target in the near term would be desirable. Further elaboration of a concrete strategy to achieve deficit reduction could also enhance the credibility of fiscal policy.
Additional progress has been made in strengthening the financial system, and the smooth shift to limited deposit insurance is evidence that tighter regulatory oversight and the economic recovery have helped stabilize the banking system. The challenge going forward is to improve risk management systems and raise bank profitability so that the banking system can better support efficient lending activity and growth. The planned privatization of Japan Post would be an important step in this regard, by leveling the playing field with private financial institutions.
More broadly, sustained structural reforms are needed to lift potential growth. As highlighted in the recent report by the expert committee ("Japan's 21st Century Vision"), the central reform objectives are to raise productivity and reap the benefits of globalization. Key measures include improving labor market flexibility, enhancing competitive forces, and encouraging foreign direct investment. Reducing agricultural trade protection is also a priority. Trade liberalization more generally will be important, and the mission encourages the authorities to show strong leadership towards a successful conclusion of the Doha Round.
Significant progress has been made in recent years to strengthen the resilience of the Japanese economy. Going forward, continued steadfast implementation of fiscal and other reforms would help secure a vibrant economic future for Japan and contribute to a stable and prosperous world economy.