## 1jpnea2020001

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### Major findings and recent developments
- Real GDP growth is estimated to be above potential at 1.0 percent in 2019.
- Output gap is narrowing; labor markets remain tight, but overall wage growth and inflation expectations remain stagnant.
- Headline CPI inflation and the BOJ’s core-core inflation (excluding fresh food and energy) have risen in recent months but remain below the Bank of Japan’s two-percent inflation target.
- Japan’s external current account surplus is estimated to have shrunk in 2019 to about 3.3 percent of GDP.
- Japan’s income surplus—arising from its large net foreign asset position and high net returns—accounts for the bulk of its current account surplus.
- Through November 2019, the yen appreciated by 2.5 percent (in real effective terms) relative to end-2018.
- Underlying growth expected to remain resilient with near-term inflation reaching about one percent; medium-term growth projected to moderate to near potential while headline inflation edges up slowly but remains below 2 percent.
- Demographic headwinds will intensify and increase macroeconomic challenges.

### Executive Board assessment and director views
- Directors welcomed resilient growth despite external headwinds and noted inflation remains below target.
- Downside risks highlighted: adverse demographics and weaker global growth.
- Policy priorities emphasized:
  - Strengthen mutually reinforcing policies of “Abenomics” and accelerate reforms to achieve sustained high growth, durable reflation, and public debt sustainability.
  - Monetary policy: remain accommodative; improve coordination with financial sector policies; clear communication; explore options to strengthen framework over time.
  - Financial sector resilience: proactively strengthen banking sector resilience; consider tightening macroprudential policies and activate the countercyclical capital buffer.
  - Fiscal policy: recent fiscal stimulus welcomed; broadly neutral fiscal stance appropriate near term; medium-term fiscal framework needed; consider redistribution, energy incentives, and cushioning vulnerable groups from consumption tax increase.
  - Structural reforms: prioritize labor market reforms to improve 2018 Work Style Reform, increase participation of female, elderly, and foreign workers; ease regulations; deepen corporate governance reform; support SMEs.
  - External: preliminarily assessed external position as broadly consistent with fundamentals; medium-term fiscal consolidation and bolder structural reforms needed to maintain external balance.
  - Governance: welcome progress combating transnational corruption; encourage improved enforcement of foreign bribery cases.

### Risks and vulnerabilities
- Immediate downside risk: sharper and more-protracted fall in consumption following the consumption tax rate increase.
- External risks: weaker world growth, de-globalization, abrupt deterioration in market sentiment (safe-haven yen appreciation, macro-financial risks).
- Medium-term risks dominated by adverse demographics—aging and shrinking population and labor force—and related slower growth.
- Fiscal risks: demographic pressures could raise debt sustainability concerns.
- Financial sector risks: adoption of riskier asset allocations to support profitability in a low-yield environment.
- Macro-financial vulnerabilities: limited monetary policy space and fiscal consolidation needs increase vulnerability to adverse shocks.

### Policy recommendations (mutually reinforcing package)
- Near-term:
  - Supportive near-term fiscal policy and continued monetary accommodation to help reflation.
- Medium-term and structural:
  - A well-specified fiscal framework, including gradual increases in the consumption tax rate and cuts to age-related expenditures to reduce debt sustainability risks.
  - Structural reforms to lift long-run growth and support reflation (priority on labor market reforms, increasing participation of female, elderly, and foreign workers; easing regulations; corporate governance reform; alternative financing for SMEs).
  - Strengthened financial sector policies (tighten macroprudential policies; activate countercyclical capital buffer as needed; improve supervision and regulation; enhance macroprudential toolkit).
- Fiscal redistribution and efficiency:
  - Consider options to strengthen redistribution effects of taxation, improve incentives to reduce energy use, and cushion vulnerable groups from consumption tax increases.
  - Reform healthcare and public social security programs to improve spending efficiency, pension sustainability, and intergenerational equity.
- Governance:
  - Continue steps to improve enforcement of foreign bribery cases and combat transnational corruption.

### Selected economic indicators and projections (exact values)
- Nominal GDP: US$ 4,954 Billion (2018)
- GDP per capita: US$ 39,166 (2018)
- Population: 126 Million (2018)
- Quota: SDR 30.8 billion (2018)
- Real GDP growth: 2017 = 2.2; 2018 = 0.3; 2019 Est. = 1.0; 2020 Proj. = 0.7; 2021 Proj. = 0.5
- Private consumption growth: 2018 = 0.0; 2019 Est. = 0.5; 2020 Proj. = -0.1; 2021 Proj. = 0.6
- Business investment: 2018 = 2.1; 2019 Est. = 1.7; 2020 Proj. = 1.0; 2021 Proj. = 3.0
- Exports of goods and services: 2018 = 3.4; 2019 Est. = -1.8; 2020 Proj. = -0.4; 2021 Proj. = 2.0
- Output Gap (annual average): 2017 = -0.3; 2018 = -0.7; 2019 = -0.3; 2020 = -0.2; 2021 = -0.3
- Headline CPI: 2017 = 0.5; 2018 = 1.0; 2019 Est. = 0.6; 2020 Proj. = 1.1; 2021 Proj. = 1.2
- General government revenue (percent of GDP): 2018 = 34.2; 2019 = 33.8; 2020 = 34.0; 2021 = 34.6
- General government expenditure (percent of GDP): 2018 = 37.3; 2019 = 37.4; 2020 = 37.6; 2021 = 38.0
- General government overall balance (percent of GDP): 2018 = -3.1; 2019 = -3.6; 2020 = -3.6; 2021 = -3.5
- Public debt, gross (percent of GDP): 2018 = 234.6; 2019 = 237.9; 2020 = 239.0; 2021 = 239.8
- Current account balance (in billions of USD): 2018 = 202.0; 2019 = 175.3; 2020 Proj. = 170.4; 2021 Proj. = 180.6; 2022 Proj. = 184.8
- Current account percent of GDP: 2018 = 4.1; 2019 = 3.5; 2020 = 3.3; 2021 = 3.4; 2022 = 3.4
- Trade balance (in billions of USD): 2018 = 44.1; 2019 = 11.6; 2020 = 2.5; 2021 = -4.3; 2022 = -10.1
- Exports of goods, f.o.b. (in billions of USD): 2018 = 688.9; 2019 = 735.9; 2020 = 701.3; 2021 = 681.5; 2022 = 693.5
- Imports of goods, f.o.b. (in billions of USD): 2018 = 644.9; 2019 = 724.3; 2020 = 698.7; 2021 = 685.9; 2022 = 703.6
- Energy imports (in billions of USD): 2018 = 117.8; 2019 = 148.5; 2020 = 130.7; 2021 = 124.1; 2022 = 117.3
- Total reserves minus gold (in billions of US$): 2018 = 1232.4; 2019 = 1239.4
- Real effective exchange rate (ULC-based, 2010=100): 2018 = 78.7; 2019 = 77.6
- Population Growth: 2017 = -0.2; 2018 = -0.2; 2019 = -0.2; 2020 = -0.3; 2021 = -0.4
- Old-age dependency: 2017 = 46.0; 2018 = 46.9; 2019 = 47.6; 2020 = 48.4; 2021 = 49.0

### Monetary policy, YCC, and JGB purchases
- Since September 2016 YCC: short-term interest rate at -10 bps; zero-percent yield target for 10-year JGBs.
- Annual change of JGB holdings reduced to ¥19 trillion, below BoJ guidance of ¥80 trillion.
- BoJ modified forward guidance; in October 2019 policy became state-contingent on inflation path.
- YCC effects:
  - YCC made monetary accommodation more sustainable but has not yet revived inflation or inflation expectations.
  - Effective monetary stimulus of YCC—as measured through the short-term interest rate gap—has been limited.
  - Reasons: low natural rate of interest (demographics); effective lower bound; low inflation expectations.
- Recommendations to strengthen monetary framework:
  - Review price stability target and consider an inflation range.
  - Adopt Inflation Forecast Targeting (IFT).
  - Simplify communication: abandon quantity guidance on JGB purchases; delink overshooting commitment from monetary base.
  - Consider adjusting YCC: steepen JGB yield curve by shifting zero percent target to shorter maturity and reduce long-maturity JGB purchases (with careful balance-sheet analysis and communication).
- BoJ view:
  - Maintains framework is working well; does not see need to adjust communication framework, review target, adopt range, replace Board forecasts with staff forecasts, or shift zero percent YCC target.

### Financial sector resilience, risks, and macroprudential measures
- Financial conditions remain loose; stability risks are rising despite aggregate capital and liquidity resilience.
- Low yields compressed banks’ net interest margins and undermined profitability, prompting risk-taking:
  - Megabanks increased investment in foreign high-yield securities including CLOs, increasing dependence on foreign currency funding.
  - Regional banks expanded lending to financially vulnerable firms and rapidly increased real estate lending; capital adequacy ratios declining.
  - Insurers shifted investments from domestic bonds to higher-yielding foreign debt instruments.
- Macroprudential recommendations:
  - Activate the countercyclical capital buffer (CCyB) (current level zero percent); consider raising CCyB and expanding coverage to domestic credit exposures of all domestic banks.
  - Implement outstanding 2017 FSAP recommendations: strengthen macroprudential supervision, establish legal basis for sectoral tools (e.g., regionally differentiated LTV/DTI), grant FSA power for Pillar 2 add-ons, intensify microprudential supervision, strengthen crisis management and resolution framework, extend TLAC to all D-SIBs, advance insurance solvency regime, and strengthen oversight of virtual asset service providers (AML/CFT).
  - Support regional bank consolidation: revenue diversification, efficiency gains, IT/Fintech adoption, and legislative support (timebound antitrust exemptions, deposit insurance fee reductions for merging banks).

### Fiscal policy, December 2019 package, and medium-term strategy
- Consumption tax increased by two percentage points on October 1, 2019 with mitigating measures (point-reward program for cashless payments, tax allowances for automobile and house purchases, infrastructure investment, additional childcare and tertiary education spending).
- Design features reduced frontloading relative to 2014: smaller rate increase and exemption of food, non-alcoholic beverages and newspapers.
- December 2019 stimulus package:
  - Three pillars: recovery/reconstruction; assistance to those facing economic downside risks; investing for the future.
  - Total size: ¥26 trillion (4.6 percent of GDP) 1/
  - Expenditure of central and local governments: ¥9.4 trillion (1.7 percent of GDP)
  - Financing by FY2019 supplementary budget (general account): ¥4.3 trillion (0.8 percent of GDP)
  - 1/ This includes a government loan program (Fiscal Investment and Loan Program) and private sector financing.
- Consumption tax countermeasures and fiscal magnitudes (selected figures, in percent of GDP unless noted):
  - Permanent: Consumption tax rate increase from 8 to 10 percent: 5.7
  - Reduced tax rate on food, non-alcoholic beverage and newspapers (8 percent): -1.1
  - Increase in tobacco and personal income taxes, etc: 0.2
  - (2.A) Permanent Social Security Spending Increase: 2.4
    - Free childcare and pre-school education: 0.9
    - Free tertiary education for low-income households: 0.4
    - Pension benefits to low-income pensioners: 0.5
    - Other social security spending: 0.4
    - Compensation for the higher consumption tax on social security costs: 0.2
  - (2.B) Infrastructure Investment: 1.2
  - (2.C) Other measures: 1.1 (selected items: subsidies to home-buyers 0.1; point reward program up to Q2 2020: 0.5; shopping vouchers: 0.1)
- Comparison in 2020:
  - Total Revenue Increases, 2020: 4.8 (0.8)
  - Total Countermeasures, 2020: 4.7 (0.8)
- Comparison in 2024 (after temporary measures expire):
  - Total Revenue Increases, 2024: 5.4 (0.9)
  - Total Countermeasures, 2024: 3.0 (0.5)
- Fiscal stance guidance:
  - 2019 fiscal stance broadly neutral (tax revenue increases largely offset by countermeasures).
  - December 2019 package projected to make 2020 fiscal stance broadly neutral.
  - Under current policies the 2021 fiscal stance would be contractionary (by about 0.6 percent of GDP) as package effects fade.
  - Staff recommends neutral fiscal stance in 2020 and, if warranted, in 2021.
- Medium- and long-term fiscal strategy:
  - Staff estimates gradual reductions in the structural primary balance of about 0.5 percent of GDP annually from 2022, accompanied by a comprehensive policy package with accelerated structural reforms, would help put debt-to-GDP on a downward path.
  - To finance aging costs, staff scenarios suggest consumption tax rate needs to rise gradually to 15 percent by 2030 and to 20 percent by 2050.
  - Staff recommends increasing capital gains tax from flat 20 percent gradually to 30 percent starting in 2022 (estimated yield approximately 0.1 percent of GDP); or re-introducing a net wealth tax of 0.5 percent on households with net financial assets over ¥100 million (approx. US$900,000) estimated to yield approximately 0.3 percent of GDP.
  - Raise carbon tax (current level ¥289 per ton of CO2 (approximately US$3 per ton) in 2019) together with measures to support vulnerable households.
  - Improve budget transparency and limit frequency/size of supplementary budgets.

### Debt trajectory, DSA baseline, and scenario probabilities
- Debt-to-GDP ratio projected to reach above 250 percent by 2030.
- DSA baseline nominal gross public debt (selected series, percent of GDP): 220.0, 234.6, 237.9, 239.0, 239.8, 241.1, 241.6, 241.6, 241.9, 242.9, 244.0, 245.5, 247.4, 249.9, 252.8.
- Net public debt (selected years, percent of GDP): 138.5, 150.8, 154.1, 155.2, 156.1, 157.4, 157.9, 158.2, 159.1, 160.2, 161.7, 163.7, 166.1, 169.1.
- Public gross financing needs (selected years, percent of GDP): 50.9, 49.5, 48.5, 48.5, 48.5, 46.8, 45.0, 45.8, 46.2, 46.1, 45.9, 45.2, 46.0, 47.0.
- Staff recommendation: gradual adjustment starting in 2022 with annual consolidation of about 0.5 percent of GDP in structural primary balance.
- Likelihoods of headline inflation reaching 2 percent by 2023Q4:
  - Baseline: 34.8 percent
  - Yen Appreciation: 27.2 percent
  - High Oil Price: 31.2 percent
- Probability of headline inflation being negative by 2023Q4:
  - Baseline: 38.6 percent
  - Yen Appreciation: 51.2 percent
  - High Oil Price: 38.8 percent
- Probability of real GDP growth falling below zero by 2023Q4:
  - Baseline: 38 percent
  - Yen Appreciation: 34.5 percent
  - High Oil Price: 35.1 percent

### Structural reforms, labor, and migration
- Work Style Reform:
  - “Equal pay for equal work” regulations to start in April 2020; overtime cap for large firms set at 100 hours per month; survey data do not yet indicate systematic reduction in working hours.
  - Positive uptake: almost 40 percent of surveyed firms report adopting flexible work styles; 20 percent overhauling performance-evaluation systems; 20 percent improving training.
  - IMF advice: complement WSR with stronger reporting framework, consider sanctions for non-compliance, programs to increase training and career opportunities for non-regular workers.
- Foreign labor:
  - New residency status in April 2019 to allow specified-skilled workers; qualification limits (no family, max five years, language/skills tests) have limited inflows.
  - As of end-November 2019: around 3,500 applicants passed required exams; 1,770 visas granted; only 1,000 foreign workers in Japan with processed new visas.
- Corporate governance and SMEs:
  - June 2018 revisions to Corporate Governance Code have not substantially reduced cross-shareholding; shareholder activism has risen.
  - IMF advice: deepen corporate governance reform (outside directors, limits on cross-shareholdings, transparency), facilitate alternative financing for SMEs, facilitate exit of non-viable SMEs and promote succession.
- Reform priorities and simulated impacts:
  - Top-tier (labor market reforms): credible reforms could offset up to 40 percent of demographic-related slowdown in real GDP growth in four decades.
  - Second-tier (regulatory and corporate reforms): could offset up to 20 percent.
  - Third-tier (trade liberalization and FDI): implementation of CPTPP and Japan-EU agreements could offset up to 4 percent.

### External position and outward/inward spillovers
- Japan’s 2019 external position preliminarily assessed as broadly consistent with fundamentals and desirable policies.
- NIIP: about 61.0 percent of GDP in 2018; Japan holds world’s largest stock of net foreign assets, valued at US$3.03 trillion at end-2018.
- NIIP generated net annual investment income of 3.8 percent of GDP in 2018.
- Current account: 2019 estimated CA about 3.3 percent of GDP; income balance contribution estimated at 3.8 percent of GDP in 2019.
- Outward spillovers:
  - A 1 percent decline in Japan’s GDP generates output losses in other Asian countries of about 0.2 percent on average after one year.
  - Prospective tightening of financial conditions in Japan could slow Japanese portfolio and FDI outflows and deteriorate global financial conditions—affecting regional emerging markets and developing countries.
  - GPIF is the world’s largest pension fund with about US$1.5 trillion of assets under management; reclassification allows FX-hedged foreign bonds (US$11.7 billion) to be labeled “domestic debt.”
- Trade developments:
  - CPTPP took effect December 2018; Japan-EU Economic Partnership took effect February 2019; Japan-U.S. agreements on market access and digital trade took effect January 2020.
  - Strengthened export procedures to Korea for semiconductor/display materials affected exports; hydrogen fluoride exports to South Korea in August, September, October: August: 0 tonnes; September: 0.1 tonnes; October: 0.9 tonnes.

### Growth at Risk (GaR) findings
- GaR methodology uses a financial gap dominated by:
  - real credit gap: weight 0.73
  - real house price gap: weight 0.22
  - real equity price gap: weight 0.05
- Current GaR: elevated at both one-year and three-year horizons; conditional distributions of detrended output growth skewed to the downside due to elevated financial vulnerabilities despite loose financial conditions.
- Historical GaR closely tracks major financial-cycle-linked downturns.

### Consumer confidence, wages, and labor market
- Consumer sentiment deteriorated significantly since mid-2018; monthly consumer confidence index softened for twelfth consecutive month in October 2019 at record-low since survey began in April.
- Real private consumption supported growth in first three quarters of 2019; real wages remained weak.
- Unemployment continued to decline; vacancy and job-openings ratios stopped increasing; employment growth has fallen due to shrinking full-time growth.
- Wage per hour growing due to fewer hours worked per employee.

### Inflation expectations and demographics (Annex I)
- Inflation expectations in Japan are persistently low, around one percent, and are strongly backward-looking and age-dependent.
- Younger Japanese have lower inflation expectations than older Japanese.
- Individuals more knowledgeable about the BoJ target had expectations between 0 to 2 percent.
- Policy implication: increase public awareness of BoJ’s two-percent target and consider cohort-specific communication to re-anchor expectations.

### Debt stress, scenario risks, and stress-test insights
- Debt-to-GDP projected to rise above 250 percent by 2030 driven by age-related expenditures and gradual increases in interest-growth differential.
- Stress tests show gross nominal public debt and public gross financing needs increase under shocks to primary balance, GDP growth, interest rates, exchange rate, and contingent liabilities.
- CCyB guidance:
  - BIS credit-to-GDP gap breaches and financial gap indicators suggest CCyB activation warranted; CCyB has remained at 0 percent since introduction on March 31, 2016.
  - GFM simulations: a phased 50-basis point CCyB applied to the entire banking sector would only slightly reduce bank credit and output growth while materially reducing banking crisis probability and severity over medium run.

### Governance and anti-corruption enforcement
- Legal changes: amendment to allow confiscation of proceeds of foreign bribery and criminalization of laundering such proceeds.
- Enforcement gaps remain: since Convention’s entry into force twenty years ago, Japan has detected 46 allegations, investigated 30, and secured convictions in five cases.
- Recommendations: enhance use of coercive investigative measures; streamline procedures to avoid delays; ensure prosecutorial independence; review jurisdiction and limitations periods; ensure effective, proportionate sanctions; broaden whistleblower protections; raise private-sector awareness.

### Staff appraisal: macro outlook, risks, and consolidated policy advice
- Outlook: economy growing above potential, inflation momentum modest, downside risks increased.
- Monetary policy: maintain accommodative stance; consider measures to enhance policy sustainability and credibility, including updated assessment of inflation consistent with price stability objective and possible inflation range.
- Financial sector: strengthen macroprudential policy, support regional bank consolidation, consider raising CCyB above zero percent.
- Fiscal policy: broadly neutral near term; medium-term fiscal framework needed; consider gradual fiscal consolidation from 2022 at about 0.5 percent of GDP annually in structural primary balance, strengthened redistribution (capital gains tax or wealth tax), and social security reform.
- Structural reforms: ambitious labor, product market, and corporate reforms essential; could offset up to 60 percent of demographic-driven slowdown in real GDP growth with credible implementation.

*Source: JAPAN STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION (January 14, 2020).*

### 1.0 percent. While the output gap is narrowing and labor markets remain tight, overall wage

### 1jpnea2020001 - 1.0 percent. While the output gap is narrowing and labor markets remain tight, overall wage

### Major findings and recent developments
- Real GDP growth is estimated to be above potential at 1.0 percent in 2019.
- While the output gap is narrowing and labor markets remain tight, overall wage growth and inflation expectations remain stagnant.
- Headline CPI inflation and the BOJ’s core-core inflation (excluding fresh food and energy) have risen in recent months but remain below the Bank of Japan’s two-percent inflation target.
- Japan’s external current account surplus is estimated to have shrunk in 2019 to about 3.3 percent of GDP, reflecting a smaller goods trade balance due to adverse external conditions.
- Japan’s income surplus—arising from its large net foreign asset position and high net returns—accounts for the bulk of its current account surplus.
- Through November 2019, the yen appreciated by 2.5 percent (in real effective terms) relative to end-2018; markets remain volatile reflecting changes in global risk aversion and the monetary policy stances of major central banks.
- Underlying growth is expected to remain resilient, bolstered by fiscal and monetary support, with near-term inflation reaching about one percent.
- Over the medium term, growth is projected to moderate to near potential and the output gap will gradually close. Headline inflation is expected to edge up slowly but remain below the Bank of Japan’s two-percent target.
- Demographic headwinds will intensify and increase macroeconomic challenges.

### Executive Board assessment and director views
- Directors welcomed Japan’s resilient economic growth performance despite external headwinds and noted that inflation remains below target.
- Downside risks weigh on the outlook, including adverse demographics and weaker global growth.
- Directors emphasized the need to strengthen the mutually reinforcing policies of “Abenomics” and accelerate reforms to achieve sustained high growth, durable reflation, and public debt sustainability.
- Monetary policy:
  - Directors agreed that monetary policy should remain accommodative while improving coordination with financial sector policies to enhance the sustainability of monetary stimulus and mitigate risks to financial stability.
  - They highlighted the importance of clear communication of policy guidance to markets.
  - Directors considered that the current monetary policy framework is working well under the circumstances, although there may be scope to explore possible options to strengthen the framework over time to improve policy flexibility and credibility.
- Financial sector resilience:
  - Noting challenges from prolonged low interest rates and rising demographic pressures, Directors stressed proactively strengthening the resilience of the banking sector.
  - They encouraged the authorities to consider tightening macroprudential policies and stand ready to activate the countercyclical capital buffer.
  - They recommended continued improvement of financial sector supervision and regulation, the risk assessment process, and the macroprudential policy toolkit.
  - Directors were encouraged by progress on implementing the 2017 FSAP recommendations and welcomed authorities’ engagement with regional financial institutions to help them adapt business models.
- Fiscal policy:
  - Directors welcomed the recent fiscal stimulus package and agreed that a broadly neutral fiscal stance is appropriate for the near term.
  - They noted that a medium-term fiscal framework that is well specified and underpinned by realistic assumptions would help ensure fiscal sustainability, lower policy uncertainty, and increase investor and consumer confidence.
  - Directors recommended considering options to further strengthen the redistribution effects of taxation, improve incentives to reduce energy use, and cushion the impact of the consumption tax rate increase on the most vulnerable.
  - They highlighted the need to reform healthcare and public social security programs to improve spending efficiency, pension sustainability, and intergenerational equity.
- Structural reforms:
  - Directors welcomed the ambitious agenda of structural reforms aimed at supporting reflation, productivity, labor supply, and growth.
  - They considered labor market reforms a priority, particularly measures to improve the 2018 Work Style Reform and increase the participation of female, elderly, and foreign workers.
  - Directors encouraged efforts to ease regulations on product and service sectors, deepen corporate governance reform, and facilitate alternative sources of financing for small- and medium-sized enterprises.
  - They commended authorities for promoting climate change awareness and advancing mitigation and adaptation policies.
- External position:
  - Directors noted staff’s preliminary assessment that Japan’s 2019 external position is assessed to be broadly consistent with fundamentals and desirable policies.
  - They noted that a medium-term fiscal consolidation plan and bolder structural reforms that support domestic demand are needed to maintain external balance.
- Governance and corruption:
  - Directors welcomed progress in combating the supply side of transnational corruption and encouraged further steps to improve enforcement of foreign bribery cases.

### Risks and vulnerabilities
- Immediate downside risk: a sharper and more-protracted fall in consumption following the consumption tax rate increase.
- External risks: weaker world growth, de-globalization, and an abrupt deterioration in market sentiment (heightening safe-haven yen appreciation and macro-financial risks).
- Medium-term risks dominated by spillovers from adverse demographics—aging and shrinking population and labor force—and related slower growth.
- Fiscal risks from demographic pressures could raise debt sustainability concerns.
- Financial sector risks from adoption of riskier asset allocations by financial institutions to support profitability in a low-yield environment.
- Macro-financial vulnerabilities, limited monetary policy space, and fiscal consolidation needs increase vulnerability to adverse shocks; these vulnerabilities will grow as the demographic transition continues.

### Policy recommendations (mutually reinforcing package)
- Near-term:
  - Supportive near-term fiscal policy and continued monetary accommodation to help reflation.
- Medium-term and structural:
  - A well-specified fiscal framework, including gradual increases in the consumption tax rate and cuts to age-related expenditures to reduce debt sustainability risks.
  - Structural reforms to lift long-run growth and support reflation (priority on labor market reforms, increasing participation of female, elderly, and foreign workers; easing regulations; corporate governance reform; alternative financing for SMEs).
  - Strengthened financial sector policies to contain build-up of systemic risks and make accommodative monetary policy stance more sustainable (tighten macroprudential policies, activate countercyclical capital buffer as needed, improve supervision and regulation, enhance macroprudential toolkit).
- Fiscal redistribution and efficiency:
  - Consider options to strengthen redistribution effects of taxation, improve incentives to reduce energy use, and cushion vulnerable groups from consumption tax increases.
  - Reform healthcare and public social security programs to improve spending efficiency, pension sustainability, and intergenerational equity.
- Governance:
  - Continue steps to improve enforcement of foreign bribery cases and combat transnational corruption.

### Selected economic indicators and projections (exact values)
- Nominal GDP: US$ 4,954 Billion (2018)
- GDP per capita: US$ 39,166 (2018)
- Population: 126 Million (2018)
- Quota: SDR 30.8 billion (2018)
- Real GDP growth: 2017 = 2.2; 2018 = 0.3; 2019 Est. = 1.0; 2020 Proj. = 0.7; 2021 Proj. = 0.5
- Private consumption growth: 2018 = 0.0; 2019 Est. = 0.5; 2020 Proj. = -0.1; 2021 Proj. = 0.6
- Business investment: 2018 = 2.1; 2019 Est. = 1.7; 2020 Proj. = 1.0; 2021 Proj. = 3.0
- Exports of goods and services: 2018 = 3.4; 2019 Est. = -1.8; 2020 Proj. = -0.4; 2021 Proj. = 2.0
- Output Gap (annual average): 2017 = -0.3; 2018 = -0.7; 2019 = -0.3; 2020 = -0.2; 2021 = -0.3
- Headline CPI: 2017 = 0.5; 2018 = 1.0; 2019 Est. = 0.6; 2020 Proj. = 1.1; 2021 Proj. = 1.2
- General government revenue (percent of GDP): 2018 = 34.2; 2019 = 33.8; 2020 = 34.0; 2021 = 34.6
- General government expenditure (percent of GDP): 2018 = 37.3; 2019 = 37.4; 2020 = 37.6; 2021 = 38.0
- General government overall balance (percent of GDP): 2018 = -3.1; 2019 = -3.6; 2020 = -3.6; 2021 = -3.5
- Public debt, gross (percent of GDP): 2018 = 234.6; 2019 = 237.9; 2020 = 239.0; 2021 = 239.8
- Current account balance (in billions of USD): 2018 = 202.0; 2019 = 175.3; 2020 Proj. = 170.4; 2021 Proj. = 180.6; 2022 Proj. = 184.8
- Current account percent of GDP: 2018 = 4.1; 2019 = 3.5; 2020 = 3.3; 2021 = 3.4; 2022 = 3.4
- Trade balance (in billions of USD): 2018 = 44.1; 2019 = 11.6; 2020 = 2.5; 2021 = -4.3; 2022 = -10.1
- Exports of goods, f.o.b. (in billions of USD): 2018 = 688.9; 2019 = 735.9; 2020 = 701.3; 2021 = 681.5; 2022 = 693.5
- Imports of goods, f.o.b. (in billions of USD): 2018 = 644.9; 2019 = 724.3; 2020 = 698.7; 2021 = 685.9; 2022 = 703.6
- Energy imports (in billions of USD): 2018 = 117.8; 2019 = 148.5; 2020 = 130.7; 2021 = 124.1; 2022 = 117.3
- Total reserves minus gold (in billions of US$): 2018 = 1232.4; 2019 = 1239.4
- Real effective exchange rate (ULC-based, 2010=100): 2018 = 78.7; 2019 = 77.6
- Population Growth: 2017 = -0.2; 2018 = -0.2; 2019 = -0.2; 2020 = -0.3; 2021 = -0.4
- Old-age dependency: 2017 = 46.0; 2018 = 46.9; 2019 = 47.6; 2020 = 48.4; 2021 = 49.0

### Macro-financial context and vulnerabilities
- Financial conditions remain loose and financial stability risks are rising despite aggregate capital and liquidity resilience in the banking system.
- Sustained low yields and fierce competition have compressed banks’ net interest margins and undermined profitability, prompting risk-taking:
  - Megabanks increased investment in foreign high-yield securities, including collateralized loan obligations (CLOs), increasing dependence on foreign currency funding.
  - Regional banks expanded lending to financially vulnerable firms and rapidly increased real estate lending; capital adequacy ratios have been declining.
  - Insurers shifted investments from domestic bonds to higher-yielding foreign debt instruments.

*Source: JAPAN STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION (January 14, 2020).*

### 3.      The Bank of Japan (BoJ) has kept policy rates stable since 2016, while significantly

### 3.      The Bank of Japan (BoJ) has kept policy rates stable since 2016, while significantly

### Monetary policy and JGB purchases
- Since the introduction of its Yield Curve Control (YCC) framework in September 2016, the BoJ has maintained:
  - a negative short-term interest rate (at -10 bps)
  - a zero-percent yield target for 10-year Japanese Government Bonds (JGBs)
- This has resulted in a significant reduction in JGB purchases, reducing the annual change of JGB holdings to ¥19 trillion, well below the BoJ’s current guidance of ¥80 trillion (Annex II).
- The BoJ has modified forward guidance by gradually extending its commitment to keep short- and long-term interest rates at their present or lower levels, and in October 2019 added that interest rate policy would be state-contingent on the path of inflation.
- Contextual pressures on the BoJ:
  - inflation below the BoJ’s two percent CPI headline inflation target
  - a weakening external environment
  - policy easing by other major central banks

### Fiscal policy: consumption tax increase and mitigating measures
- Consumption tax rate increased by two percentage points as planned on October 1.
- Accompanying measures to smooth demand volatility and mitigate impact:
  - (i) a point-reward program for cashless payments in SMEs (Annex III)
  - (ii) a tax allowance for automobile and house purchases
  - (iii) infrastructure investment
  - (iv) additional spending for childcare and tertiary education
- Design features that likely reduced frontloading relative to 2014:
  - smaller rate increase (2 versus 3-percentage points in 2014)
  - exemption of food, non-alcoholic beverages and newspapers
- Observed demand dynamics:
  - last-minute pickup in demand for some durable goods in September, followed by a drop in October exacerbated by Typhoon Hagibis

### Structural reforms, labor, and migration
- Work Style Reform:
  - Plans to implement “equal pay for equal work” regulations starting in April 2020, including guidelines to eliminate “irrational gaps” between regular and non-regular workers with oversight by national labor bureaus.
  - Limitations: gaps vaguely defined; system relies on workers’ request to firms for information and explanation.
  - Overtime cap (in effect for large firms since April 2019) set at 100 hours per month; survey data do not yet indicate a systematic reduction in working hours.
  - Positive uptake: almost 40 percent of surveyed firms report adopting some form of flexible work style; 20 percent are overhauling performance-evaluation systems; 20 percent are improving training.
- Foreign labor:
  - New residency status for foreign workers enacted in April 2019 to allow higher inflows of specified-skilled workers in sectors with serious labor shortages (nursing, restaurants, construction, agriculture).
  - Qualification requirements have limited inflows: in most cases workers cannot bring family members, cannot stay more than five years, and must pass Japanese language and skills tests.
- Corporate governance and financial sector:
  - June 2018 revisions to the 2015 Corporate Governance Code have not substantially reduced cross-shareholding; shareholder activism and votes against management have increased.
  - Government Pension Investment Fund (GPIF) introduced incentives for external asset managers to increase activism in the domestic equity portfolio.
  - BoJ ETF purchases have made it one of the largest shareholders of listed companies, potentially reducing scope for activist investors.
  - The Financial Services Agency (FSA) plans to ease restrictions on banks’ investments in other banks by relaxing capital requirements for non-internationally active banks.
  - Government amended the foreign investment law in November 2019 to subject foreign investment in national security-related industries to greater scrutiny (plans to cover aerospace, electricity, telecommunications, broadcasting, railway, software).

### Trade developments
- Trade agreements and dates:
  - Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) took effect in December 2018.
  - Japan-EU Economic Partnership took effect in February 2019.
  - Japan and the U.S. signed agreements in October 2019 on market access for agricultural and industrial goods and on digital trade; these agreements took effect in January 2020.
- Korea export measures:
  - Strengthened procedures for exports to Korea of materials critical for producing semiconductors and displays (including hydrogen fluoride) and reciprocal suspension of streamlined export procedures may have affected exports from Japan to Korea, with limited macroeconomic effects so far.
  - Exports from Japan to Korea of automobiles and tourism have also fallen.
- Japan: Exports of Hydrogen Fluoride to South Korea (selected months):
  - August: 0 tonnes
  - September: 0.1 tonnes
  - October: 0.9 tonnes

### Authorities’ views (monetary, fiscal, financial)
- Authorities’ assessment of the economy:
  - economy expanding at a moderate pace, though weakening global growth has affected exports, production and business sentiment
  - corporate profits remain high, private consumption remains unaffected, and business fixed investment—particularly related to labor-augmenting technology—has supported private investment
  - inflation relatively weak compared to economic expansion and tight labor market conditions
  - consumption tax increase implemented without significant trouble; countermeasures have helped contain overall consumption volatility
  - plan to continue advancing bilateral and regional trade agreements
- BoJ view on JGB purchases:
  - reduction in JGB purchases consistent with YCC guidelines and partly reflects downward pressures on yields from global developments and increased demand by foreign investors
- FSA view:
  - financial system assessed as stable; will continue to closely monitor financial intermediation functioning and excessive risk taking by financial institutions

### Growth outlook and inflation
- Near-term outlook:
  - economy expected to continue its expansion in the near term
  - inflation edging up but unlikely to reach BoJ’s two-percent target over the medium term under current policies
  - Growth in 2020–21 will be supported by domestic demand, aided by the December 2019 fiscal stimulus package—offsetting an expected fall in net exports
  - adverse external conditions will dampen export-driven private investment and manufacturing; non-manufacturing investment expected to stay firm due to investment in labor-saving technologies
  - over the medium term, external conditions will improve and support growth converging to potential, contributing to a gradual reduction in the output gap
  - expected and actual inflation projected to remain below target under current policies

### Risks (near-term, medium-term, and sectoral)
- Near-term risks:
  - sharper and more-protracted fall in consumption following the consumption tax increase
  - weaker-than-expected global growth (particularly in China) and further de-globalization
  - abrupt deterioration in market sentiment (disorderly Brexit, geopolitical tensions) leading to risk aversion, safe-haven yen appreciation, and macro-financial risks
  - disruptions in U.S. dollar funding markets increasing funding costs for some Japanese banks (Annex VII)
- Medium-term risks dominated by demographics:
  - population aging and shrinking projected to shrink by over 25 percent in the next 40 years (official projections)
  - fraction of population aged 65+ projected to increase from 28 to 38 percent over next 40 years; total population projected to shrink from 127 million to 95 million by 2058
- Specific medium-term risk channels:
  - Financial sector risks: adoption of riskier asset allocations to support profitability in a low-yield environment could tighten capital adequacy constraints and undermine domestic credit growth; collapse in equity prices could lead to large valuation losses for banks, insurers and pension funds; aging/shrinking population would decrease demand for financial assets, placing downward pressure on asset prices
  - External imbalances: aging expected to reduce public and private saving-investment balance in more advanced phases of aging, while age-related fiscal spending rises; fiscal consolidation without a medium-term fiscal framework or structural reforms could re-emerge in excessive external imbalances
  - Public debt sustainability and bond market stress: growing demographic-fiscal pressures could heighten debt sustainability concerns and trigger bond market stress, increasing debt service and refinancing risks for the sovereign
  - Housing market stress (tail risk): oversupply of housing due to declining population could put downward pressure on house prices—raising risks for household and regional bank balance sheets

### Policy recommendations (summary of IMF guidance)
- General prescription:
  - comprehensive and mutually reinforcing policies needed to lift current and expected inflation, stabilize debt, and raise potential growth
- Main elements:
  - (i) supportive near-term fiscal policy and continued monetary accommodation to help reflation
  - (ii) a well-specified fiscal framework centered on gradual increases in the consumption tax rate and cuts to age-related expenditures to reduce debt sustainability risks
  - (iii) structural reforms to lift long-run growth and support reflation
  - (iv) strengthened financial sector policies to contain systemic risk build-up and make accommodative monetary policy more sustainable
- Monetary and financial policy specifics:
  - maintain BoJ’s accommodative monetary policy stance
  - better coordinate monetary and financial sector policies to enhance policy sustainability and mitigate financial stability risks
  - strengthen the monetary policy framework to lift inflation expectations and improve policy flexibility
  - adjust the YCC framework, consider tightening macroprudential policy by activating the countercyclical capital buffer, and support regional bank consolidation to address low profitability and discourage excessive risk taking
- Fiscal policy specifics:
  - near-term fiscal and income policies should complement BoJ reflation efforts and structural reforms
  - medium-term fiscal consolidation plan should be based on realistic growth assumptions and lay out concrete fiscal measures to reduce policy uncertainty and boost demand, providing additional near-term fiscal space while ensuring fiscal sustainability
- Structural reform specifics:
  - imperative to lift long-run growth potential and stabilize government debt
  - near-term demand bolstered by strengthened confidence, enhanced expectations and more effective monetary transmission (e.g., through a higher natural real interest rate) would help offset deflationary supply-side effects

*Source: 1jpnea2020001 - 3.      The Bank of Japan (BoJ) has kept policy rates stable since 2016, while significantly*

### 16.      The YCC framework has made monetary accommodation more sustainable, but has not yet

### 1jpnea2020001 - 16.      The YCC framework has made monetary accommodation more sustainable, but has not yet

### Effects of YCC on inflation and monetary stimulus
- The YCC framework has made monetary accommodation more sustainable but has not yet revived inflation or inflation expectations.
- The effective monetary stimulus of YCC—as measured through the short-term interest rate gap—has been limited.
- Reasons cited:
  - the low natural rate of interest due to adverse demographic trends;
  - the inability to further reduce the real interest rate due to the effective lower bound and low inflation expectations.
- Without structural reforms to raise the natural rate of interest (by boosting productivity growth), and with financial side effects of prolonged monetary accommodation becoming more acute, finding a means to raise inflation expectations is critical.

### Financial sector impacts and risks from a flattened yield curve
- Sustained accommodative policy and recent declines in global bond yields have flattened the JGB yield curve and pushed yields into negative territory up to the 10-year maturity.
- Consequences:
  - Reduced net lending margins and investment income of banks, insurers and pension funds with substantial JGB holdings.
  - Encouraged risk taking and riskier asset allocations by financial institutions.
- To alleviate financial stability concerns and ensure durable monetary stimulus, actions are needed to strengthen and activate macroprudential policy and adjust the YCC framework.

### Recommendations to strengthen the monetary policy framework
- Maintain an accommodative policy stance while considering measures to enhance credibility and predictability:
  - Reviewing the price stability target:
    - An updated assessment of the inflation level consistent with the price stability objective could be carried out.
    - Review would allow the BoJ to: (i) reconfirm its commitment to the target; (ii) increase policy flexibility by introducing an inflation range around the target; and (iii) emphasize the medium- to long-term nature of achieving the price stability objective.
  - Increasing policy flexibility:
    - Introduce a range around the current inflation target while emphasizing the medium- to long-term nature of achieving the price stability objective.
    - Careful market communication would be needed to avoid being misinterpreted as a move towards monetary policy normalization.
  - Strengthening the conduct of monetary policy:
    - Adopt Inflation Forecast Targeting (IFT) to improve policy credibility and predictability by making monetary policy respond more systematically to deviations of BoJ’s inflation forecast from the price stability target.
  - Improving communication with financial markets and the public:
    - Simplify policy guidance by abandoning the quantity guidance on JGB purchases and delinking the overshooting commitment from the monetary base.
    - Replace Board members’ forecasts currently published in the BoJ’s Outlook Report with a BoJ staff forecast consistent with the agreed policy path (consistent with an IFT strategy).

### Adjusting YCC and macroprudential actions to support financial stability
- Adjusting the YCC framework:
  - Consider steepening the JGB yield curve by shifting the zero percent JGB yield target from the 10-year to a shorter maturity, and reducing purchases of JGBs with longer term residual maturities.
  - Expected effects: raise investment income of financial institutions, boost public sentiment via higher rates of return on insurance and pension products, while only slightly tightening financial conditions (economic activity is most responsive to short- to medium-term interest rates; most variable rate loans are linked to TIBOR; average duration of fixed rate loans is 3 to 4 years).
  - Caveat: careful balance-sheet analysis is needed to assess whether future profit gains would exceed losses on existing JGB holdings.
  - Communication must ensure such a move is not interpreted as signaling the end of monetary accommodation.
  - Over time, profitability challenges (e.g., regional banks) call for restructuring and business model adjustment.
- Activating the countercyclical capital buffer (CCyB):
  - Total credit has been growing faster than nominal GDP, financial conditions remain loose, and financial vulnerabilities are rising.
  - The FSA should consider raising the CCyB from its current level of zero percent, while expanding its coverage to the domestic credit exposures of all domestic banks, not just internationally active ones.
  - Expected impact: very limited effects on bank credit and output growth in the short run, while materially reducing the probability and severity of a banking crisis over the medium run.

### Macrofinancial and regulatory reforms recommended for medium-term resilience
- Implement outstanding 2017 FSAP recommendations:
  - Strengthening macroprudential supervision and regulation:
    - Intensify risk assessment and complete the macroprudential policy toolkit.
    - Establish a legal basis for sectoral macroprudential tools to manage housing market related risks, e.g., possibly regionally differentiated loan-to-value or debt-service-to-income limits on mortgage loans.
  - Intensifying microprudential supervision and regulation:
    - Encourage banks to improve risk management and resilience through forward-looking loan-loss provisioning.
    - Grant the FSA power to set Pillar 2 capital buffer add-ons to tailor individual banks’ capital requirements.
  - Supporting business model adjustment and consolidation in regional banks:
    - Encourage revenue diversification, efficiency gains, IT/Fintech adoption, and consolidation.
    - FSA and BoJ to work jointly to assist regional banks, including supporting legislative reform to: (i) introduce timebound exemptions for regional banks from anti-trust laws for mergers and consolidation; and (ii) proposals to provide financial assistance for consolidation by reducing deposit insurance fees for banks that do merge.
  - Address other financial sector policy issues:
    - Strengthen crisis management and resolution framework, e.g., extend Total Loss-Absorbing Capacity requirements to all domestic systemically-important banks (D-SIBs).
    - Continue steps toward introducing an economic-value-based solvency regime for the insurance sector.
    - Strengthen oversight of virtual asset service providers by ensuring they are subject to AML/CFT supervision in line with international standards.

### Authorities’ views
- Bank of Japan (BoJ):
  - Stressed that while inflation has been somewhat weak, momentum toward achieving the price stability target is maintained.
  - Argued monetary stimulus continues to be effective—evidenced by accommodative financial conditions and a tight labor market—and that inflation expectations showed weakness primarily due to actual low inflation.
  - Emphasized raising actual inflation by maintaining positive output gap for as long as possible to achieve 2 percent medium- to long-term inflation expectations.
  - Recognized need to continue powerful monetary easing, mitigate financial sector side effects, and accelerate structural reforms.
  - Did not see a need to adjust the monetary policy communication framework, review the price stability target, adopt an inflation target range, replace Board forecasts with staff forecasts, or shift the zero percent YCC target from the 10-year to a shorter maturity—judging the current framework as working well and striking a balance between effects and side effects.
  - Noted legal constraint that ETFs held by the BoJ do not make the BoJ the shareholder with voting rights under the Act on Investment Trusts and Investment Corporations.
- Financial Services Agency (FSA):
  - Assessed the financial system as stable with financial intermediation not overheating.
  - Observed property and equity prices rising but not overvalued; household and nonfinancial corporate debt rising but leverage not excessive; bank lending to the real estate sector has stopped growing rapidly.
  - Argued the banking system is resilient with capital and liquidity buffers well above regulatory requirements; therefore, did not see CCyB activation as warranted at the current juncture but will continue close monitoring.
  - Described a revamped supervisory framework with an Early Warning Mechanism to identify banks with medium-term profitability concerns, engage management on business models, and take administrative actions if necessary.
  - Noted regional banks face increasing profitability challenges with downward trend in core net profitability but adequate capital buffers; urged development of sustainable business models through diversification, efficiency, and consolidation.
  - Governor Kuroda noted BoJ and FSA are working jointly to assist regional banks in reform efforts.

### Fiscal policy note
- The December 2019 stimulus package will moderate the decline in growth in 2020 and should be accompanied by a clear commitment to long-term fiscal sustainability.
- While Japan has some fiscal space—helped by limited funding risks and low borrowing costs—the high level of public debt, adverse demographics, and projected rise in social security spending call for a renewed and well-communicated approach to defining medium- and long-term fiscal targets.

*Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1jpnea2020001.pdf — Section 16*

### 26.      A broadly neutral fiscal stance is appropriate for 2020 and could, if warranted, be

### 26.      A broadly neutral fiscal stance is appropriate for 2020 and could, if warranted, be

### Fiscal stance and near-term guidance
- The increase in consumption tax revenue is expected to be largely offset by expenditure increases and revenue losses from the mitigating measures, making the 2019 fiscal stance broadly neutral.
- The December 2019 stimulus package is projected to make the 2020 fiscal stance broadly neutral.
- Under current policies the 2021 fiscal stance would be contractionary (by about 0.6 percent of GDP) as the effects of the package fade.
- Given downside risks and the need to avoid a pro-cyclical fiscal tightening that might undermine growth momentum, a neutral fiscal stance might also be called for in 2021, unless economic data outturns are stronger than expected.

### Recommended near-term fiscal measures
- Address the devastation caused by natural disasters:
  - Prompt fiscal measures should support efforts to rebuild infrastructure and provide relief to affected vulnerable population.
- Extend consumption tax countermeasures in 2020 or design an exit strategy to minimize consumption volatility and cushion the most vulnerable:
  - Point reward program expiry in June 2020 could make private consumption volatile; options include phasing out the reward rate towards the end of 2020, or replacing the program with another measure with similar economic impact.
- Increase wages of workers in childcare, health and long-term care sectors further:
  - While critical to contain growth in social security spending, rising demand for these services needs to be matched by supply-side measures to ensure adequate staffing and quality of service.
- Reinforce income policies and protect the most vulnerable:
  - Clear government commitment for more effective corporate tax incentives for wage increases, higher minimum wages, and increase in administratively-controlled wages and social transfers.
  - Administered prices should be set by a mechanism that better reflects costs, with safeguards for low-income households.
- Support structural reforms:
  - Raise childcare availability and strengthen firms’ incentives to provide childcare and nursing-care.
  - Enhance non-regular workers’ productivity (training and career prospects).
  - Boost R&D investment.
- Measures to lessen impact on agriculture from trade opening:
  - Incentivize value-added products (including exports of wagyu beef), facilitate scale-up of small-sized farms, and enhance rural infrastructure spending.
  - Package includes measures to bolster preparedness of farm facilities against typhoons and other natural disasters.

### December 2019 package: objectives, pillars, and size
- Three pillars:
  - (i) Recovery and reconstruction from disasters, and ensuring safety and security
  - (ii) Focused assistance to those who are overcoming the economic downside risks
  - (iii) Investing for the future and maintenance and improvement of economic vitality after the Tokyo Olympics and Paralympics
- Total size: ¥26 trillion (4.6 percent of GDP) 1/
- Expenditure of central and local governments: ¥9.4 trillion (1.7 percent of GDP)
- Financing by the FY2019 supplementary budget (general account): ¥4.3 trillion (0.8 percent of GDP)
- 1/ This includes a government loan program (Fiscal Investment and Loan Program) and private sector financing.
- (the Cabinet Decision of December 5th, 2019)
- Package title: Japan: Comprehensive Economic Measures to Create a Future with Security and Growth

### Consumption tax countermeasures and fiscal magnitudes (selected figures)
- Permanent: Consumption tax rate increase from 8 to 10 percent: 5.7
- Reduced tax rate on food, non-alcoholic beverage and newspapers (8 percent): -1.1
- Increase in tobacco and personal income taxes, etc: 0.2
- (2.A) Permanent Social Security Spending Increase: 2.4
  - Free childcare and pre-school education: 0.9
  - Free tertiary education for low-income households: 0.4
  - Pension benefits to low-income pensioners: 0.5
  - Other social security spending: 0.4 (Including higher wages for nursing care-workers and nursery school teachers.)
  - Compensation for the higher consumption tax on social security costs: 0.2
- (2.B) Infrastructure Investment: 1.2 (Infrastructure updates including to prevent/mitigate damages caused by natural disasters. Three year program until FY2020.)
- (2.C) Other measures: 1.1
  - Increase in subsidies to home-buyers: 0.1 (Increase the upper limit of the subsidies (Sumai-Kyuhu-kin) from ￥300,000 to ￥500,000.)
  - Point reward program for home-buyers: 0.1 (Targeted to energy-saving, quake-resistant, and barrier-free houses.)
  - Extension of tax breaks for housing loans: 0.1 (Extend the period (from 10 to 13 years) when borrowers of housing loans enjoy deductions from their personal income taxes (i.e. benefits will accrue for 3 extra years).)
  - Reduction of car acquisition tax up to Q3 2020 (Environmental Performance-based Tax Break): 0.0
  - Reduction of car possession tax: 0.1
  - Point reward program up to Q2 2020: 0.5 (5 percent reward is applied to cashless payments at small retailers (and 2 percent reward for franchise stores).)
  - Shopping vouchers for 6 months: 0.1 (Low-income households or those with children are eligible to purchase shopping vouchers with a 25 percent premium (up to ￥20,000 per person).)
- Comparison in 2020:
  - Total Revenue Increases, 2020: 4.8 (0.8)
  - Total Countermeasures, 2020: 4.7 (0.8)
- Comparison in 2024 (after temporary measures expire):
  - Total Revenue Increases, 2024: 5.4 (0.9)
  - Total Countermeasures, 2024: 3.0 (0.5)
- Table sources: Ministry of Finance, the Cabinet Office, IMF staff estimates.

### Medium- and long-term fiscal strategy: steps to bolster credibility
- Adopt realistic growth and fiscal projections:
  - Staff estimates that gradual reductions in the structural primary balance of about 0.5 percent of GDP annually from 2022, accompanied by a comprehensive policy package with accelerated structural reforms, would help put the debt-to-GDP ratio on a downward path over the long term.
- Factor in aging costs:
  - Staff scenarios suggest that to finance aging costs, the consumption tax rate would need to increase gradually to 15 percent by 2030 and to 20 percent by 2050.
  - The consumption tax rate increases should be done gradually on a regular (preferably legislated) schedule to smooth the economic impact and minimize policy uncertainty.
- Strengthen redistribution effects and address inequality:
  - Japan’s capital gains tax is a flat rate of 20 percent; staff recommends gradually increasing the capital gains tax rate to 30 percent, starting in 2022.
  - Alternatively, re-introduction of a wealth tax could be considered. A net wealth tax of 0.5 percent levied on households with net financial assets worth over ¥100 million (approx. US$900,000) yields an estimated approximately 0.3 percent of GDP.
  - If the capital gains tax rate increases to 30 percent, the estimated yield is approximately 0.1 percent of GDP.
- Raise the carbon tax:
  - Japan’s carbon tax stands at ¥289 per ton of CO2 (approximately US$3 per ton) in 2019.
  - A higher carbon tax should be considered, together with measures to support vulnerable households; time-bound grandfathering or a phased-in approach could mitigate short-term adverse impacts.
- Improve transparency of the budgetary framework:
  - There have been ten supplementary budgets since the beginning of Abenomics in late 2012. Limiting the frequency and size of supplementary budgets would help reduce policy uncertainty and increase effectiveness of macroeconomic demand support.

### Options for fiscal policy adjustment by 2030 (selected potential yields)
- Increase consumption tax rate from 10 to 15 percent
- Contain growth rate of health and long-term spending
- Increase healthcare and long-term care copayments
- Re-introduce wealth tax/ Raise capital gains tax
- Increase carbon tax
- Total potential savings: Up to 6.0 (in percent of GDP) 1/
- 1/ These estimates build on findings in 2018 Japan Selected Issues paper "Japan - Options for Healthcare Reform" and McGrattan and others (2018).

### Reform of public social security programs (pension, healthcare, long-term care)
- Pension:
  - Recent projections indicate a funding gap under conservative scenarios if the committed replacement ratio (of 50 percent) is maintained.
  - Reforms should focus on improving pension sustainability and intergenerational equity: encourage elderly working population to defer pension drawdowns and lengthen the contribution period; expand the contributions base.
  - The initiative to provide additional pension benefits to low-income pensioners is welcome, but distributional impact could be strengthened by financing it with a reduction in pension benefits for the wealthy (instead of financing it with consumption tax revenues).
  - Social security and tax reforms should remove disincentives to full-time and regular work to help address gender inequality.
- Healthcare and long-term care:
  - Reforms could focus on: (i) improving efficiency through wider use of generic drugs and rationalization of in- and out-patient care; (ii) increasing the share of out-of-pocket spending for those over 75 years old and the wealthy elderly, with safeguards for vulnerable households; and (iii) reducing the scope of covered services and drugs.
  - On long-term care, explore measures to contain costs, including rationalizing services to those with lower-care needs.
  - Example: If the share of generic drugs (over the sum of the generic drugs and the branded drugs which compete with the generic drugs) is raised from 72.6 percent in 2018 to 90 percent on a volume basis, its fiscal savings would be worth 0.1 percent of GDP.

### Strengthening policy coordination and authorities’ views
- Strengthening coordination between monetary and fiscal policy remains a high priority to revitalize the economy and achieve the 2 percent inflation target.
- The January 2013 Joint Statement (by Cabinet Office, Ministry of Finance, and Bank of Japan) lays out coordinated measures to revitalize the economy and achieve the 2 percent inflation target, including regular review by the Council on Economic and Fiscal Policy; this mechanism should be used to ensure fiscal and monetary policies work in tandem.
- Authorities agreed with staff on the need for near-term fiscal policy to support the economy given rising global uncertainty.
- Authorities highlighted that the December 2019 economic measures contain various measures to mitigate the adverse economic impact of recent natural disasters, and would help the economy navigate global headwinds and realize sustainable growth mainly led by private demand beyond the 2020 Olympics.

*Source: IMF staff compilation from the referenced country report text.*

### 31.      The authorities consider that their medium-term macro-fiscal projections are based on

### 1jpnea2020001 - 31.      The authorities consider that their medium-term macro-fiscal projections are based on

### Medium-term macro-fiscal projections and fiscal consolidation
- Authorities consider medium-term macro-fiscal projections to be based on realistic assumptions.
- Scenario assumptions and variants:
  - In a scenario where current economic policies show solid results, total factor productivity growth rate is assumed to rise based on past performance.
  - Assumption was revised downward when setting the FY2025 primary-balance target, reflecting views of private sector representatives in the Council of Economic and Fiscal Policy.
  - Authorities also maintain a more prudent projection where the economy grows approximately at the rate of current potential growth.
  - Aging-related costs are deemed to be duly taken into account in projections of social security expenditures.
- Fiscal consolidation framework and implementation:
  - “The New Plan to Advance Economic and Fiscal Revitalization” decided by the Cabinet in June 2018 is being steadily implemented.
  - The Council of Economic and Fiscal Policy (CEFP), chaired by the Prime Minister, established “the Reform Time Schedule” to clarify concrete actions for each fiscal year and set Key Performance Indicators (KPI) over 140 expenditure-related areas, such as social security, infrastructure and education.
  - The Council revises the schedule annually; an experts committee under the CEFP (academics on economics and public finance and experts in various fields) calls senior officials of ministries to explain progress toward KPI and evaluates it.
- Gap to FY2025 target and response:
  - There is a gap between the authorities’ FY2025 primary-balance target and the projected path of primary balances without additional policy measures; authorities recognized they will continue to implement reforms to fill the gap.
  - The social security reform package (to be finalized in mid-2020) is expected to contribute to pursuing the fiscal consolidation target.
  - Objective of comprehensive social security reform: rebalance the so-called “people who support” and “people who are supported,” and continue measures to contain social security expenditures via reform and promotion of further labor participation.
- Inequality and distributional considerations:
  - Authorities view that due consideration has been given to inequality issues via recent tax and expenditure measures including:
    - (i) an increase in the personal income tax rate for the top bracket from 40 to 45 percent (effective since 2015),
    - (ii) a reduction of various deductions for high-income earners (effective since 2013, 2016, 2017 and 2020),
    - (iii) an increase in the tax rate on financial investment income from 10 to 20 percent (effective since 2014),
    - (iv) an increase in the inheritance tax (effective since 2015), and
    - (v) the additional pension benefits to low-income pensioners (effective since October 2019).
  - To support gender equality and women in the labor market, authorities continue to increase childcare availability and consider the 2017 revision of the spousal tax deduction to reduce incentive for part-time workers to limit their working hours.
- Policy coordination:
  - Authorities stressed that existing policy coordination frameworks, including the 2013 Joint Statement, already deliver coordinated monetary and fiscal policy and consider the 2013 Joint Statement still relevant and appropriate while maintaining institutional independence.

### Structural reforms — reflation and growth (staff analysis and simulations)
- Demographic headwinds and macro impact:
  - Aging and depopulation will depress productivity growth and investment, shrinking real GDP growth.
  - Staff analysis finds worsening demographics could reduce real GDP by 25 percent in four decades under current policies (relative to a scenario where recent growth performance is maintained).
- Potential gains from credible reforms:
  - Credible implementation of specified reforms, accompanied by continued accommodative monetary stance and public debt stabilization, can help reflation and increase real GDP by as much as 15 percent in four decades, relative to a current-policies scenario—this could offset as much as 60 percent of the demographic-driven slowdown in real GDP growth.
  - Reflation is driven by a demand boost from confidence effects (firms and households increase investment and consumption due to higher expected capital returns and permanent income), with simulations showing about a 1 percentage point increase in inflation in the long run.
  - A not-fully-believed path of reforms would not help reflation and would deliver significantly smaller increases in near-term real GDP.
  - To strengthen reform credibility and confidence effects, specific steps to enhance government commitment—a communication strategy and/or legislation—would be central in supporting reflation.

### Reform priority tiers, simulated offsets, and recommendations
- Top-tier: Labor market reforms that increase productivity and labor supply
  - Staff view: Improve the 2018 Work Style Reform (WSR) to boost productivity and wages; introduce measures to further increase labor supply including strengthening firms’ incentives to support women in the labor force.
  - Simulation impact: Credible top-tier reforms could offset up to 40 percent of the demographic-related slowdown in real GDP growth in four decades.
- Second-tier: Regulatory and corporate reforms to lift productivity and investment
  - Measures: Product and service sectors deregulation, SME reforms and corporate governance reforms; broader adoption of automation and AI (with distributional considerations).
  - Simulation impact: Credible second-tier reforms could offset up to 20 percent of the demographic-related slowdown in real GDP growth in four decades.
- Third-tier: Trade liberalization and FDI promotion
  - Measures: Further removal of tariff and non-tariff barriers, implementation of CPTPP and Japan-EU trade agreements.
  - Simulation impact: Implementation of CPTPP and Japan-EU trade agreements could offset up to 4 percent of the demographic-related slowdown in real GDP growth in four decades.

### Authorities’ views on reforms and specific policy measures
- Work Style Reform (WSR) and labor policies:
  - Authorities: Ongoing implementation of WSR will boost productivity by improving skills and encouraging firms’ investment, raise wages, and reduce excessive overtime; implementation of “equal pay for equal work” expected to start in April 2020.
  - Authorities are considering measures to secure employment opportunities beyond age 65 and plan consultations on workplace regulation and gender equality.
  - They highlighted incentives provided by a public procurement system that supports women, including in managerial positions, and noted the number of female board members in listed firms continues to rise.
- Other measures and reforms:
  - Authorities highlighted 2019 plans to abolish the regulated retail electricity tariff in 2020; April 2016 marked full liberalization of electricity retail sale.
  - Farmland Institutions established to increase agricultural productivity by facilitating farmland consolidation through leasing, including private firms.
  - Ongoing discussion on corporate governance reform aims to increase quality of dialogue between asset managers and firms.
  - Recently updated foreign investment law aims to further promote FDI conducive to sound economic growth and ensure minimal review of FDI that could pose risks to national security.
  - Authorities acknowledged their global leadership role in advancing bilateral and regional trade agreements.

### Detailed top-tier and second-tier reform assessments and advice (selected items)
- Top-tier reforms (selected measures and IMF advice):
  - Work Style Reform (WSR):
    - Legislation done in 2018 with three pillars: (i) mandatory caps on overtime; (ii) equal pay for equal work; and (iii) exemption from work hour regulations (including overtime limits) for highly-paid professionals.
    - Guidelines for implementation of the "equal pay for equal work" pillar completed in 2019; implementation will start in April 2020.
    - IMF advice: Complement WSR with a stronger reporting framework of firms’ wage gaps and job descriptions; consider sanctions for non-compliance with “equal pay for equal work”; programs to increase training and career opportunities of non-regular workers including via contract reform.
  - Female and Older Worker Labor Force Participation:
    - WSR includes measures to limit overtime; female and older worker LFP have continued to rise since "Abenomics" started.
    - IMF advice: Eliminate disincentives in social security and tax systems to full-time and regular work; increase availability of childcare and nursing facilities; incentivize gender-balanced management; outlaw discriminatory workplace regulations (e.g., dress code); reduce the gender wage gap; encourage managerial practices rewarding productivity; consider abolishing firms’ right to set a mandatory retirement age.
  - Foreign labor:
    - New residency status put in place in April 2019 to allow higher inflows of specified-skill workers in sectors with labor shortages; WSR includes considerations to increase use of foreign human resources; Special Economic Zones (SEZ) encourage use of foreign human resources.
    - IMF advice: Government’s recent efforts to increase foreign labor should be pushed forward.
- Second-tier reforms (selected measures and IMF advice):
  - Product and service sectors deregulation:
    - Deregulation efforts have occurred in electricity, gas, and agricultural sector.
    - IMF advice: Continue deregulation to increase productivity and investment by lowering barriers to entry, removing incumbents’ protections in some industries (gas and telecom), deregulating professional services, and further agricultural deregulation (including elimination of subsidy support and allowing majority holdings of private companies in agricultural enterprises).
  - SME reforms:
    - Since April 2018, coverage of credit guarantees to SMEs from Safety Net Program No.5 lowered from 100 to 80 percent; new Safety Net Guarantee program established for substantive crisis with 100 percent guarantee.
    - IMF advice: Facilitate exit of non-viable SMEs and entry of firms with stronger potential; reduce coverage of credit guarantee system to incentivize alternative financing sources; support SME R&D investment and succession of aging CEOs in high-growth potential firms.
  - Corporate governance:
    - Japan’s Stewardship code introduced in February 2014 and revised in May 2017; Companies Act amended in June 2014; corporate governance code introduced June 2015 with June 2018 revisions.
    - IMF advice: Deeper corporate governance reform could help deploy cash reserves and boost investment/productivity, including via more ambitious requirements for outside directors, explicit limits on cross-shareholdings, and enhanced transparency of beneficial ownership.
  - Special Economic Zones:
    - Ten areas designated in 2014-15; used as laboratory for reforms but local-level measures have been slow to progress.

### External position and spillovers
- Current account and income balance:
  - Japan’s external current account (CA) surplus decreased by 0.6 percentage points to 3.5 percent of GDP in 2018, while the income balance remained stable.
  - Income balance: Japan’s income surplus—arising from its large net foreign assets (NFA) position and high net returns—accounted for the bulk of the 2018 CA surplus; income surplus was significantly higher than other G7 countries mainly due to relatively: (i) high yields on foreign assets; (ii) low FDI and portfolio debt liabilities; and (iii) low yields on portfolio debt liabilities.
  - The overall CA surplus has been relatively stable as dissaving by the public and household sectors has offset rising corporate saving.
- Developments and outlook:
  - Higher energy prices were an important driver of the decrease in the CA surplus in 2018, with the goods trade balance falling to 0.2 percent of GDP.
  - The CA surplus is estimated to have shrunk further in 2019 to about 3.3 percent of GDP, reflecting a smaller goods trade balance—with exports decreasing more than imports—due to adverse external conditions.
  - Through November 2019, the yen appreciated by 2.5 percent (in real effective terms) relative to end-2018.
- Assessment and policy implications:
  - The 2019 external position is preliminarily assessed as broadly consistent with fundamentals and desirable policies.
  - Based on this CA assessment, the 2019 real exchange rate is also preliminarily assessed as in line with the real exchange rate level consistent with fundamentals and desirable policies.
  - Looking ahead, a well-specified medium-term fiscal consolidation plan and bolder and credible structural reforms that support growth and domestic demand are needed to maintain external balances that are not excessive.
  - Staff estimates that credible implementation of structural reforms outlined above would reduce the external current account surplus by over 1 percent of GDP in the medium term.

*Source: Excerpt from IMF country report chapter on Japan.*

### 42.      Slower growth or a tightening of financial conditions in Japan could have significant

### Slower growth or a tightening of financial conditions in Japan could have significant adverse outward spillovers.

### Outward spillovers and financial flows
- A 1 percent decline in Japan’s GDP generates output losses in other Asian countries of about 0.2 percent on average after one year.
- A prospective tightening of financial conditions in Japan could slow positive spillovers from Japanese portfolio and FDI outflows and from overseas diversification by Japanese institutional investors, potentially deteriorating global financial conditions and disrupting global capital flows—particularly to regional emerging markets and developing countries.
- The October 2019 reclassification of the assets of Japan’s Government Pension Investment Fund (GPIF) allows continued shifting from domestic bonds towards foreign bonds offering higher returns.
  - GPIF is the world’s largest pension fund with about US$1.5 trillion of assets under management.
  - The reclassification labels FX-hedged foreign bonds (US$11.7 billion holdings) as “domestic debt.”
- Higher overseas investment by GPIF will export both loose financial conditions from Japan during normal times, and tight financial conditions during times of stress when GPIF retrenches its foreign exposures.

### Trade, multilateralism, and inward spillovers
- Global uncertainty and monetary policy abroad
  - A more accommodative monetary stance by other major central banks, along with heightened global uncertainty from trade and geopolitical tensions, could lead to appreciation of the yen—undermining BoJ’s reflation efforts.
- Trade and FDI openness
  - Japan’s trade and FDI regimes are relatively open, while agriculture ranks as less open among G20 economies.
  - Ongoing global trade tensions and any further escalation could reduce Japan’s net exports, investment, and growth—including via direct and indirect effects through global value chains and adverse spillovers to Japan’s financial sector.
- Multilateralism
  - Further advancement of multilateralism—within an open, stable, and transparent rules-based international trade system—would help mitigate adverse inward spillovers to Japan from a rise in protectionism or global uncertainty.
- World Economic Outlook simulations (noted in text)
  - Ongoing global trade tensions will reduce global activity—with 2020 global output about 0.8 percent below a no-tariff baseline, and a reduction in Japan’s output by 0.5 percent relative to baseline.
  - The October 2018 WEO simulations estimated long-term real GDP losses of 0.2 percent in Japan from auto tariffs, relative to baseline.

### Supply-side of transnational corruption: findings and concerns
- Progress and legal reforms
  - Japan amended its law in 2017 to allow confiscation of the proceeds of foreign bribery and criminalized the laundering of such proceeds.
  - In June 2018 Japan introduced a new Agreement Procedure to encourage cooperation by those with first-hand knowledge of certain types of crimes, including foreign bribery.
  - Japan’s agency for official development assistance has debarred five Japanese and foreign companies for foreign bribery since December 2011.
- Enforcement gaps and recommendations
  - Concerns remain about lack of proactivity and low levels of investigations and convictions:
    - Since the Convention’s entry into force twenty years ago, Japan has detected only 46 allegations of foreign bribery, investigated 30, and secured convictions in five cases.
  - Japan urgently needs to improve foreign bribery enforcement by:
    - Enhancing use of coercive investigative measures to obtain evidence in foreign bribery cases.
    - Streamlining the Ministry of Justice’s procedures for transmitting allegations to prosecutors to prevent undue delays in opening investigations.
    - Ensuring that decisions to investigate or prosecute foreign bribery cases are free from undue Executive influence, including from the Ministry of Economy, Trade and Industry and the Ministry of Justice.
  - Legal and outreach improvements recommended:
    - Review legislation to ensure jurisdiction to prosecute Japanese companies that engage in bribery abroad, even when the individuals involved were neither Japanese nationals nor in Japan.
    - Extend the limitations period for prosecuting foreign bribery cases.
    - Ensure sanctions for natural and legal persons are effective, proportionate, and dissuasive.
    - Broaden the scope of whistleblower protections.
    - Further raise awareness of the foreign bribery offence within the private sector.

### Authorities’ views (as reported)
- The authorities agreed with the preliminary 2019 external assessment and related policy recommendations, while reiterating concerns regarding the methodology (REER assessment and the EBA methodology).
  - They assert that trade balance and income balance’s low REER semi-elasticities indicate lack of potential external adjustment via REER.
  - They argue EBA should account for different implications on value creation, including varying propensity to consume between shareholders and workers.
  - They note that the large unexplained portion of the EBA CA gap does not by itself prove important bottlenecks to investment and consumption.
  - They consider that a large and positive NFA position with its implied large income account surplus does not pose global financial stability risks per se and favor a focus on sustainability of external gross liabilities.
- On outward spillovers and multilateralism:
  - The authorities did not see significant outward spillovers from Japan at this time but agree multilateralism can mitigate inward spillovers from global trade disputes.
  - They view continued advancement of multilateralism as a significant force to counterbalance any further rise in protectionism.

### Staff appraisal: macro outlook, risks, and policy recommendations
- Macroeconomic outlook and risks
  - Japan’s economy is growing above potential despite external headwinds, but inflation momentum remains modest and downside risks have increased.
  - Underlying growth is expected to remain solid with near-term inflation reaching about one half of one percent, with a still-negative output gap.
  - Over the medium term, growth is projected to moderate to near potential; inflation is expected to edge up slowly but remain below the Bank of Japan’s two-percent target; and the output gap will gradually close.
  - Significant risks include a more-protracted fall in consumption following the tax rate increase, weaker-than-expected global growth, and rising adverse demographic pressures.
- Monetary policy
  - The strategy of Abenomics remains appropriate; the accommodative stance of monetary policy should be maintained.
  - The Bank of Japan (BoJ) should maintain its short- and long-term interest rate targets to support growth and inflation, while considering measures to enhance policy sustainability.
  - Suggested BoJ actions include an updated assessment of the inflation level consistent with the price stability objective, possibly introducing an inflation range around the target and emphasizing the medium- to long-term nature of achieving the price stability objective.
- Financial sector policies
  - Strengthen macroprudential policy and support regional bank consolidation to contain financial risks from demographic headwinds and prolonged low interest rates.
  - Consider raising the countercyclical capital buffer above its current zero percent level to proactively build resilience.
  - The Financial Services Agency (FSA) should intensify its risk assessment process, complete its macroprudential policy toolkit, and engage with regional banks to adapt business models (revenue diversification, better utilization of IT/Fintech, consolidation).
- Fiscal policy
  - A broadly neutral fiscal stance is appropriate for the near term, with continued monetary accommodation.
  - The December 2019 stimulus package is projected to make the 2020 fiscal stance broadly neutral; under current policies the 2021 fiscal stance is projected to be contractionary.
  - Given downside risks, a neutral fiscal stance might also be called for in 2021 unless economic data are stronger than expected.
  - Additional near-term fiscal measures could include: extending the duration of consumption tax countermeasures; further increasing wages of workers in the childcare, health and long-term care sectors; reinforcing income policies; and supporting structural reforms.
  - A well-specified medium-term fiscal framework is needed to reduce debt, lower uncertainty, and support reflation and growth:
    - Government has set a primary balance target for FY2025; credibility would benefit from greater realism in productivity, growth, and public spending assumptions and more specificity on measures to achieve the target.
    - Steps could include adopting realistic growth and fiscal projections; factoring in aging costs in macro-fiscal projections; strengthening redistribution by raising taxation on capital gains or re-introducing a wealth tax; and raising the carbon tax.
    - Reform of public social security programs is essential, focusing on pension sustainability and intergenerational equity; healthcare reforms should include measures to increase the share of out-of-pocket spending for those over 75 years old and the wealthy elderly.
- Structural reforms
  - Implementation of an ambitious agenda of labor, product market, and corporate reforms is essential to offset demographic headwinds.
  - Such reforms could offset as much as 60 percent of the demographic-driven slowdown in real GDP growth.
  - Priority reforms:
    - Labor market reforms (highest growth and inflation impact): improve on the 2018 Work Style Reform, emphasize additional training and career opportunities for non-regular workers; enhance labor supply from women, older workers, and foreign workers.
    - Corporate and product market reforms: deregulation of product and service sectors, corporate governance reforms, SME reform with support for alternative financing and business succession to lift productivity and investment.

*International Monetary Fund — Japan: Staff report excerpts (selected content provided).*

### 57.      The 2019 external position is preliminarily assessed to be broadly consistent with

### 1jpnea2020001 - 57.      The 2019 external position is preliminarily assessed to be broadly consistent with

### External position, real exchange rate, and spillovers
- The 2019 external position is preliminarily assessed to be broadly consistent with fundamentals and desirable policies.
- The estimated 2019 current account balance is preliminarily assessed as broadly consistent with medium-term fundamentals and desirable policies.
- Based on this current account assessment, the 2019 real exchange rate is also preliminarily assessed as in line with the real exchange rate level consistent with fundamentals and desirable policies.
- Risks and spillovers:
  - Slower growth or a tightening of financial conditions in Japan could generate significant outward spillovers in the form of slower growth in other Asian countries and a deterioration of global financial conditions.
- Policy implication:
  - A well-specified medium-term fiscal framework and bolder structural reforms that support growth and domestic demand are needed to maintain external balance.

### Enforcement against foreign bribery
- Recent legal changes:
  - Amendment to allow confiscation of the proceeds of foreign bribery and criminalization of laundering such proceeds, closing a longstanding loophole in Japan’s implementation of the OECD Anti-Bribery Convention.
- Assessment and remaining concerns:
  - The 2019 report of the OECD Working Group on Bribery in International Business Transactions noted that Japan had made a number of improvements since its last evaluation.
  - Notwithstanding recognition of recent improvements, concerns remain regarding the low level of enforcement of cases of foreign bribery of Japanese and foreign public officials.
- Recommendation:
  - Greater efforts in raising the number of such investigations and convictions is urged.

### Article IV consultation timing
- Recommendation:
  - It is recommended that the next Article IV consultation take place on the standard 12-month cycle.

### Foreign workers in Japan (Box 1)
- Trend and composition:
  - The share of foreign employment rose from 1.1 percent in 2012 to 2.0 percent in 2017.
  - Vietnam, China and the Philippines accounted for most of the foreign labor inflows over 2012–17.
  - Top-employing sectors: manufacturing, hotels/restaurants, and wholesale/retail.
- Policy changes and visa design:
  - April 2017: Japanese Green Card for Highly Skilled Foreign Professionals reduced period of stay required before applying for permanent residence from five years to one.
  - November 2017: residency of technical interns extended from three to five years.
  - April 2019 reforms (Immigration Control and Refugee Recognition Act amendment, passed December 2018):
    - New Specified Skills Visa Status allows foreigners to enter Japan to work in designated sectors for a maximum period of five years (Category 1 visa status).
    - Period of stay under Category 1 visa limited to five years; workers are not able to bring family members.
    - Category 2 residence status intended for workers with more advanced skills; Category 1 workers could upgrade to Category 2 by passing an examination and meeting other conditions.
- Expectations and preliminary outcomes:
  - Expectation at inception: around 340,000 workers would be granted Category 1 visas between 2019 and 2024, in addition to technical trainees—Japan accepted around 480,000 trainees between 2013 and 2017.
  - As of end-November 2019:
    - around 3,500 applicants had passed required exams to apply,
    - 1,770 visas granted,
    - only 1,000 foreign workers in Japan (with processed new visas).
  - Conclusion: Preliminary indications suggest the 2019 reforms have had limited success, with a slow pace in the admissions process and limited take-up of Category 1 visas.

### Nagi-town case study: child-friendly policies (Box 2)
- Context:
  - Nagi-town: population of about 6,000.
  - After rejecting a merger in 2002, the town office pursued policies to raise fertility to preserve economic viability.
- Key measures:
  - Financial benefits: one-time payouts for childbirth on a rising scale from ¥100,000 (about US$900) for the first child up to ¥400,000 (about US$3,600) for the fifth child; free healthcare for children until graduation from high school.
  - Cooperative community: “Child Home” community center run by mothers; elderly volunteers provide child care help.
  - Housing: town developed three new residential districts; 21 houses currently rented to families with children.
  - Employment opportunities: small industrial park with 18 firms; one-stop facility for part-time job matching; decision to build a new childcare facility to expand capacity.
- Outcome:
  - Total fertility rate doubled from 1.4 in 2005 to 2.8 in 2014.
- Lesson:
  - Multi-faceted, comprehensive child-friendly policy support can have a meaningful impact on the fertility rate.

### Government initiatives to promote gender equality (Box 3)
- Legal and administrative framework:
  - 2015 Act on Promotion of Women’s Participation and Advancement in the Workplace encourages employers to formulate and publish action plans and promote work-life balance.
  - Firms with more than 300 employees (100 employees since 2019) are required to publish action plans and information on at least one of: (i) record on providing job opportunities for women; or (ii) record on supporting work-life balance and a suitable work environment.
- Public procurement incentives:
  - 2016: introduction of Eruboshi certification (including “L -Stars” and “Platinum L-Stars”) to certify employers with outstanding performance on women’s participation and advancement.
  - Central and local governments take Eruboshi certification into account in procurement; extra points are given to Eruboshi-certified firms that bid for a government contract.
- Implementation and outcomes (as of June 2019 and FY2017):
  - Action plans and disclosures:
    - 15,983 firms (96.7 percent of employers with more than 300 workers) have submitted action plans.
    - 10,645 firms have published data on key metrics stipulated in the law.
  - Eruboshi certification and procurement:
    - The government signed 13,600 contracts with Eruboshi-certified companies for purchases worth a total of ¥1.34 trillion (0.24 percent of GDP) in FY2017.
    - As of June 2019, 870 companies nationwide have been awarded Eruboshi certificates.

### Consumer confidence (Box 4 — opening observation)
- Observation:
  - Japan’s consumer sentiment has deteriorated significantly since mid-2018 for all age-groups, with the largest decline observed for young Japanese.
  - According to the monthly consumer confidence index, Japanese consumer sentiment softened for the twelfth consecutive month in October 2019, hitting a record-low level since the survey began in April.

*International Monetary Fund — Japan: selected excerpts from the 2019 consultation chapter*

### 2013. While the index recovered mildly in

### 1jpnea2020001 - 2013. While the index recovered mildly in

### Consumer confidence and consumption
- Consumer confidence declined broadly across age-groups, weakening the most for the youngest cohort (age below 29 years).
- The decline in consumer confidence is largely due to idiosyncratic factors:
  - The consumption tax rate increase of October 2019 weakened perceptions of the economy and household purchasing power.
  - Compared to the decline in confidence at the time of the consumption tax rate increase of 2014, the decline was larger in 2019 despite the smaller increase in the tax rate.
  - Heightened global uncertainty due to ongoing trade tensions likely dampened consumer confidence beginning in 2018.
- Structural factors related to adverse demographics may have constrained consumption:
  - Concerns about sustainability of the social security system and perceptions of longer life expectancy could have dampened sentiment and consumption activity.

### Savings behavior and demographics
- Saving rates increased in recent years, a trend that precedes recent global trade tensions.
- Saving rates increased for all age groups and are higher for younger cohorts than older cohorts.
- The rate of increase in saving rates is noticeably larger for retirees (those above age 65 years), which is difficult to reconcile with a standard Modigliani life-cycle hypothesis.
- One possible explanation: accompanying increase in life-expectancy over time leading to uncertainty about personal finance and incentivizing continued saving, including among retirees.

### Recent economic developments and growth composition
- Growth in the first three quarters of 2019 was supported by private consumption and public spending.
- Contributions to real GDP (In percent QoQ, SA) shown include:
  - Private gross fixed investment, Government spending, Net exports, Private consumption, Private inventories (change), Real growth (QoQ) (chart-based).
- Real wage and real consumption growth:
  - Real private consumption and Real wage per regular employee (In percent, YoY quarterly-rolling average) indicate real wages remained weak even as consumption supported growth.
- Private investment has been soft (Dwellings, Plant/Equipment; In percent YoY).
- Real imports have been volatile (2017Q1=100; SA).
- World exports weakened in 2019; Japan’s exports to most major trading partners declined in 2019 (2017Q1=100; Volumes).

### Inflation developments
- Headline inflation decreased in recent months.
- Japanese yen strengthened in 2019 in NEER terms (Jan 2017=100).
- BoJ underlying inflation measures show some positive signs (10 percent trimmed-mean, Mode, Diffusion Index).
- The October 2019 consumption tax rate increase was partly offset by free education and price cuts of some items.
- Import and export prices decreased, reflecting lower oil prices.
- Producer prices increased following the consumption tax rate increase.
- Inflation indicators (In percent YoY) examples:
  - Headline, Core core (ex. fresh food and energy), Core (ex. fresh food).
- Headline CPI (In percent, YoY) values in Table 11 monthly series (examples): 0.4, 0.3, 0.2, ... and headline CPI in Table 4 projections: 2019: 0.6; 2020: 1.1; 2021: 1.2.

### Monetary policy transmission
- JGB yields across maturities have fallen significantly; term spreads declined.
- Real interest rates remain depressed (Real Lending Rate net of 10 year inflation swaps; Real 10-year JGB Rate net of 10 year inflation swaps).
- Corporate bond spreads increased for the lowest-rated bonds (AA/A/BBB-rated corporate-government bond spreads shown).
- Spreads on bank loans have increased (Diffusion index for the past three months; + values correspond to increased spreads).
- Growth in bank lending has weakened (Total, Large corporations, SMEs, Individuals; Growth in Bank Lending In percent YoY).
- BoJ’s balance sheet continues to expand but at a declining pace (BoJ JGB Holdings by Maturity, 2013-2019 in trillions JPY).
- Portfolio rebalancing has been implemented by public pensions; currency, deposits & government securities holdings changed (2013–2019Q2 shares).
- Net portfolio outflows by residents continue (Foreign Asset Purchase/Sales by Japanese Residents; Jan-13 to Oct-19 in millions JPY).
- Deflation concerns among households have fallen since 2016 (Share of Households with One Year Ahead Inflation Expectation; Nov-19).
- Some reduction in medium-term inflation expectations of businesses (Tankan Survey: 1 Year ahead, 3 Year ahead, 5 Year ahead; levels shown e.g., 2019Q1: 1.1, 1.3 ...).
- Market-based inflation expectations indicators stabilized in recent months (Inflation-Swaps 5Y/10Y; Break-even rate 10Y JGBs; Nov-19).

### Financial markets developments
- The yen appreciated across the board in 2019 (Selected Exchange Rates Jan 3, 2017=100).
- Net short-yen positions re-emerged in late-2019 (Chicago Mercantile Exchange Yen Position; Yen per dollar).
- Market uncertainty somewhat reduced at end-2019 (VIX Index and Yen/Dollar Exchange Rate).
- U.S.-Japan interest rate differentials fell as the U.S. Fed lowered interest rates (Interest Differential In percent; Nov-19).
- Equity indices broadly flat in 2019 (NIKKEI 225, TOPIX, TOPIX-REIT, TOPIX-BANKS, S&P 500; Jan 2017=100; Nov-19).
- U.S. dollar funding costs fell recently (USD LIBOR (3M), BOJ USD funds-supplying operations rate, FX swaps-Implied USD rate (3M), US 10-year Treasury Yield; Nov-19).

### Labor market and wages
- Unemployment rate continued to decline (Unemployment Rate In percent of labor force, SA; e.g., 2019Q3 values in charts).
- Decline observed for both male and female workers.
- Ratio of job-openings-to-applicants stopped increasing; vacancy rate and job openings ratio shown.
- Tight employment conditions moderated in manufacturing (Tankan Enterprise Survey: Employment Conditions diffusion index).
- Increase in full-time employment since 2009 crisis concentrated in non-manufacturing sectors; increase in part-time employees remained dominant (Change in Full-time and Part-time Employees by sector, thousands of persons).
- Employment growth has fallen, mainly due to shrinking growth in full-time workers (Employment Growth Rate average annual; Sep-19).
- Real wage growth per employee remains weak; nominal wage growth per employee and headline inflation charted (Real Wage Growth per Regular Employee).
- Wage per hour is growing due to fewer hours worked per employee; decline in average hours for part-time and full-time workers noted.
- Amid a declining population, female labor force participation picked up; market income inequality increased (Labor Force Participation Rate charts; Gini Coefficient).
- Wage growth per hour and hours worked trends for part-time and full-time employees shown in charts.

### Fiscal developments and sustainability
- Fiscal balance remains in deficit but projected to improve due to the 2019 consumption tax rate increase and expiration of December 2019 stimulus package.
- BoJ’s JGB holdings and domestic investors’ home bias help maintain favorable funding environment.
- Age-related costs will increase in coming years (Financing of Health Care (HC) and Long-Term Care (LTC) projected linearly).
- Public debt is unsustainable under current policies and will continue to rise along with age-related costs.
- Relative to peers, Japan’s share of non-social security spending has remained low, while there is room for increasing tax revenue.
- General government indicators from Table 4 and Table 7 (selected exact figures):
  - General government revenue: 2019: 34.0; 2020: 34.6; 2021: 34.6 (percent of GDP).
  - General government expenditure: 2019: 37.6; 2020: 38.0; 2021: 37.4 (percent of GDP).
  - Overall balance: 2019: -3.6; 2020: -3.5; 2021: -2.8 (percent of GDP).
  - Primary balance: 2019: -3.3; 2020: -3.4; 2021: -2.9 (percent of GDP).
  - Public debt, gross: 2019: 239.0; 2020: 239.8; 2021: 241.1 (percent of GDP).
  - Financing of HC and LTC (In percent of GDP) displayed by components and projections (1995–2060 timeline).

### Demographics and gender inequality
- Over the next 40 years, population projected to shrink by over 25 percent; old-age dependency ratio will sharply increase (G7: Old-Age Dependency Ratio chart).
- Market income inequality has been increasing, with higher inequality in poorer and older prefectures (Gini Coefficients of Yearly Income 2014).
- Gender inequality is significant, though male-female wage differential has decreased in recent data (Monthly Wages Male vs. Female; Male/Female Ratio).
- Women’s economic participation increased, but most women are employed as non-regular or part-time workers, contributing to higher inequality (Employment by Format and Gender charts).
- Women are underrepresented in managerial and policy-making positions (Proportion of women in director and section chief roles; Women in Managerial Roles In percent).
- Gender wage gap is large in Japan across prefectures and relative to other OECD countries (Gender Wage Gap In percent of male median wage; Japan ranked).

### Key projections and selected economic indicators (exact figures from Table 4, Table 8)
- High-level country data (from Table 4 header):
  - Nominal GDP: US$ 4,954 Billion (2018)
  - GDP per capita: US$ 39,166 (2018)
  - Population: 126 Million (2018)
  - Quota: SDR 30.8 billion (2018)
- Real GDP growth (Table 4 Est./Proj.):
  - 2017: 2.2
  - 2018: 0.3
  - 2019: 1.0
  - 2020: 0.7
  - 2021: 0.5
- Inflation and deflators (Table 4):
  - Headline CPI: 2017: 0.5; 2018: 1.0; 2019: 0.6; 2020: 1.1; 2021: 1.2
  - GDP deflator: 2017: -0.2; 2018: -0.1; 2019: 0.6; 2020: 1.0; 2021: 0.5
- Government and debt (Table 4 & Table 7):
  - General government revenue: 2019: 34.0
  - General government expenditure: 2019: 37.6
  - Overall Balance: 2019: -3.6
  - Public debt, gross: 2019: 239.0 (percent of GDP)
- Medium-term projections (Table 8 key entries):
  - Real GDP 2019: 1.0; 2020: 0.7; 2021: 0.5; 2022: 0.4; 2023: 0.5; 2024: 0.5; 2025: 0.5
  - Headline CPI inflation (average): 2019: 0.6; 2020: 1.1; 2021: 1.2; 2022: 1.2; 2023: 1.3; 2024: 1.3; 2025: 1.3
  - Overall fiscal balance (percent of GDP): 2019: -3.6; 2020: -3.5; 2021: -2.8; 2022: -2.4; 2023: -2.3; 2024: -2.4; 2025: -2.6
  - Gross general government debt (percent of GDP): 2019: 239.0; 2020: 239.8; 2021: 241.1; 2022: 241.6; 2023: 241.6; 2024: 241.9; 2025: 242.9

### Monthly economic indicators snapshot (selected exact values from Table 11)
- PMI-Manufacturing (levels across months): Examples include 52.7, 53.3, 52.4, 52.7, 53.1, ... through 49.3, 48.9, 48.4 in later months.
- Consumer confidence (level) monthly series: 43.0, 42.7, 44.1, 43.1, 43.9, 43.8, 43.9, 43.7, 44.1, 44.2, 44.3, 44.3, 44.7, 44.0, 44.4, 43.4, 44.1, 44.1, 43.6, 43.5, 43.5, 42.9, 42.7, 42.5, 41.9, 41.2, 40.5, 40.0, 39.5, 38.9, 37.9, 37.2, 35.9, 36.3,  (series continues).
- Yen per U.S. dollar (level) monthly values include: 114.9, 113.1, 112.9, 110.0, 112.2, 111.0, 112.4, 109.8, 110.8, 112.9, 112.8, 112.9, 111.0, 107.8, 106.1, 107.6, 109.7, 110.1, 111.5, 111.0, 112.1, 112.8, 113.4, 112.2, 109.0, 110.5, 111.1, 111.7, 110.0, 108.1, 108.3, 106.2, 107.5, 108.2, NEER and REER (CPI-based) monthly series also reported.

*Prepared by Gee Hee Hong (APD).*

### Annex I. Inflation Expectations in Japan: Backward-Looking and

### Annex I. Inflation Expectations in Japan: Backward-Looking and Age-Dependent

### Importance of inflation expectations for policy
- Japan experienced almost twenty years of deflation, which ended in the mid-2010s, and since then inflation expectations in Japan have been persistently low.
- Despite aggressive monetary easing by the Bank of Japan since the introduction of Abenomics, inflation expectations remain at around one percent.
- Raising inflation expectations is central to reaching the Bank of Japan’s two-percent inflation target and to lowering real interest rates when nominal interest rates are bounded at the effective lower bound.
- It is essential to understand how Japanese form inflation expectations to design policies that can raise stubbornly-low expectations.

### Evidence on backward-looking expectations and cross-country context
- Inflation expectations in Japan seem to be strongly backward looking, largely influenced by observed current and past inflation.
- Among G7 countries, Japan has the lowest contribution to CPI core (excluding food and fuel commodities) inflation dynamics and CPI headline inflation dynamics coming from expected inflation.
- Expected inflation has a strong negative contribution to deviations of core and headline inflation from the headline CPI target (figures referenced in source).

### Survey evidence on knowledge of the BoJ target and expectation anchoring
- Individuals who are more knowledgeable about the Bank of Japan’s inflation target had inflation expectations between 0 to 2 percent (Diamond, Watanabe and Watanabe (2019), survey evidence).
- This relationship holds across age groups: both those 30 years old and under and those older than 30 years were more likely to expect inflation in the 0 to 2 percent range.

### Age-dependent patterns in inflation expectations
- Younger Japanese have lower inflation expectations than older Japanese (survey results).
- Using data combining inflation expectations and demographic information:
  - The proportion of respondents who believe that prices will increase by at least 5 percent rises with age.
  - The proportion of respondents who believe that there will be deflation decreases with age.
- A plotted distribution (One-Year-Ahead Inflation Expectations Over Age, 2014) shows age cohorts and the share expecting various ranges (e.g., <-10%, -10% to -5%, -5% to -2%, -2% to 0%, 0% to 2%, 2% to 5%, 5% to 10%, >10%).

### Possible explanations for age effects
- Differences in consumption patterns:
  - Older households consume more of the high inflation rate items than younger households.
  - Even for the common basket of goods, older Japanese above age 45 years pay a higher price than younger Japanese.
  - These differences suggest older Japanese face higher inflation rates than consumers in other age groups, which may raise their inflation expectations.
- Lifetime experience of inflation:
  - Older Japanese experienced periods of inflation while younger Japanese have largely lived through periods of deflation.
  - After controlling for household-level inflation rates, there is a statistically significant positive correlation between age and expected inflation rates.
  - The Diamond et al. (2019) study shows individual inflation expectations are strongly correlated with the inflation rate of the macroeconomy over their lifetimes, implying that forward-looking inflation rates may be influenced by historical inflation experiences.

### Policy relevance and implications
- Since inflation expectations are backward-looking and age-dependent, policy measures to re-anchor expectations may need to:
  - Increase public awareness and understanding of the Bank of Japan’s two-percent inflation target to improve expectation anchoring (evidence: those knowledgeable about the target have expectations between 0 to 2 percent).
  - Consider cohort-specific channels (younger cohorts with low lifetime inflation experience may require targeted communication or policy demonstrations to alter expectations).
- Raising inflation expectations is a key lever to achieving the BoJ’s two-percent inflation target and to lowering real interest rates when nominal rates are near the effective lower bound.

*Source: Annex I. Inflation Expectations in Japan: Backward-Looking and Age-Dependent.*

### Annex V. Growth at Risk in Japan

### Annex V. Growth at Risk in Japan

### Introduction
- Growth at risk (GaR) measures the highest output growth rate predicted to occur with a given probability at a given horizon, conditional on a set of predictor variables.
- GaR differs from an assessment of the balance of risks to the growth outlook, which is conditional on all available information.
- This annex presents short and medium run GaR estimates for Japan, conditional on financial gap estimates, and benchmarks them against corresponding estimates for the United States.
- Prepared by Francis Vitek (MCM).

### The financial gap
- Financial vulnerability indicators: real credit, house price and equity price gaps, estimated using the HP-filter with a smoothing parameter of 16,000 to pass through low-frequency cyclical dynamics.
- Aggregation method: fixed effects panel regression of the change in each standardized financial vulnerability indicator on a linear combination of lagged financial vulnerability indicators, estimated by pooled quantile regression with dummy variables at the 0.05 quantile using a two-year lag order.
- The resultant financial gap is the weighted average of financial vulnerability indicators that predicts a severe broad-based unwinding of financial vulnerabilities when elevated.
- Estimated weights:
  - real credit gap: 0.73
  - real house price gap: 0.22
  - real equity price gap: 0.05
- Historical behavior: the estimated financial gap peaks prior to the bursting of the credit-fueled property and stock market bubbles in Japan in the early 1990s, and in the United States in the late 2000s.

### Historical GaR
- Estimation approach: GaR is estimated as the predicted lower quantile of detrended output growth, conditional on the lagged change in and level of the estimated financial gap.
- Regression details: fitted values from a fixed effects panel regression of detrended output growth on these predictor variables, estimated by pooled quantile regression with dummy variables at the 0.05 quantile.
- Lags and filters:
  - short run GaR: one-year lag order
  - medium run GaR: three-year lag order
  - detrended output: HP-filter with smoothing parameter 16,000
- Historical fit:
  - Short and medium run GaR estimates closely track business cycle downturns associated with financial cycle downturns in Japan in the early 1990s, and in the United States in the early 1990s, early 2000s and late 2000s.
  - GaR estimates do not fully track the sharp business cycle downturn in Japan in the late 2000s, because that downturn was mainly caused by trade spillovers during the GFC and did not coincide with a sharp domestic financial cycle downturn.

### Current GaR
- At the current juncture, GaR in Japan is estimated to be elevated at both the short and medium run horizons.
- Conditional distributions of detrended output growth are skewed to the downside, indicating relatively high downside risks to output growth.
- These elevated downside risks reflect elevated financial vulnerabilities despite loose financial conditions.
- Visual depiction (described): current predicted distribution of detrended output growth versus historical average, fitted using a skewed Student-t density; shown separately for short run and medium run horizons.

### Key findings and implications
- Elevated financial vulnerabilities imply heightened downside risk to output growth in both the one-year and three-year horizons.
- The financial gap—dominated by the real credit gap with weight 0.73—serves as a leading indicator that peaks before major financial unwindings.
- Loose financial conditions at present coexist with elevated vulnerability, producing a skewed (downside) conditional distribution for future detrended output growth.
- Benchmarking with the United States shows GaR methodology captures major historical financial-cycle-linked downturns in both economies.

### References cited within annex
- Adrian, T., N. Boyarchenko and D. Giannone, 2019, “Vulnerable Growth,” American Economic Review, Vol. 109, pp. 1263–89.

*Source: Annex V. Growth at Risk in Japan*

### 8. The pace of increase in the debt-to-GDP ratio is projected to start rising in 2024, with

### 8. The pace of increase in the debt-to-GDP ratio is projected to start rising in 2024, with

### Debt trajectory and drivers
- Debt-to-GDP ratio projected to reach above 250 percent by 2030.
- Projection drivers:
  - Rising age-related expenditures.
  - Gradual increases in the interest-growth differential.
  - Reliance on domestic investors’ home bias with high domestic saving and large JGB purchases by the BoJ.
- Key risk: the favorable interest-growth differential could be tested in the absence of a credible fiscal policy framework including a concrete medium-term fiscal consolidation plan.

### DSA baseline and dynamics (selected indicators and projections)
- Nominal gross public debt (selected years, in percent of GDP): 220.0, 234.6, 237.9, 239.0, 239.8, 241.1, 241.6, 241.6, 241.9, 242.9, 244.0, 245.5, 247.4, 249.9, 252.8.
- Net public debt (selected years, in percent of GDP): 138.5, 150.8, 154.1, 155.2, 156.1, 157.4, 157.9, 158.2, 159.1, 160.2, 161.7, 163.7, 166.1, 169.1.
- Public gross financing needs (in percent of GDP, selected years): 50.9, 49.5, 48.5, 48.5, 48.5, 46.8, 45.0, 45.8, 46.2, 46.1, 45.9, 45.2, 46.0, 47.0.
- Real GDP growth (in percent, selected years): 0.4, 2.2, 0.3, 1.0, 0.7, 0.5, 0.4, 0.5, 0.5, 0.5, 0.3, 0.3, 0.3, 0.3.
- Inflation (GDP deflator, in percent, selected years): -0.2, -0.2, -0.1, 0.6, 1.0, 0.5, 0.8, 1.0, 0.8, 0.5, 0.8, 0.8, 0.8, 0.8.
- Effective interest rate (in percent, selected years): 1.1, 0.8, 0.7, 0.7, 0.6, 0.5, 0.5, 0.5, 0.6, 0.7, 0.8, 0.9, 1.1.
- Change in gross public sector debt (annual, in percent of GDP, selected years): 6.8, -1.9, 3.2, 1.1, 0.9, 1.3, 0.5, 0.0, 0.3, 1.0, 1.1, 1.5, 1.9, 2.4, 3.0 (cumulative change reported as 15.0).
- Identified debt-creating flows (cumulative and annual components shown): primary deficit, automatic debt dynamics (interest-rate/growth differential), other identified flows, contingent liabilities, residuals.

### Policy recommendation: fiscal framework and consolidation path
- Staff recommends a neutral fiscal stance in 2020 and, if warranted, 2021.
- Gradual adjustment to start from 2022 with annual consolidation of about 0.5 percent of GDP in the structural primary balance.
- With gradual consolidation and a comprehensive policy package including accelerated structural reforms, this would moderately bring down the debt-to-GDP ratio.

### Scenario analysis and stress tests (model and DSA outcomes)
- Model-based medium-term projection (New Keynesian model with Japan-specific features):
  - Real GDP growth stabilizes at the estimated potential rate.
  - Inflation remains below the Bank of Japan’s two percent inflation target.
  - A positive output gap is needed to generate gradual inflation increase; headline inflation rises but falls short of 2 percent.
- Likelihoods of outcomes in 2023Q4 (Table 1):
  - Probability of headline inflation reaching 2 percent:
    - Baseline: 34.8 percent
    - Yen Appreciation: 27.2 percent
    - High Oil Price: 31.2 percent
  - Probability of core inflation reaching 2 percent:
    - Baseline: 34.8 percent
    - Yen Appreciation: 27.1 percent
    - High Oil Price: 31.3 percent
  - Probability of headline inflation being negative:
    - Baseline: 38.6 percent
    - Yen Appreciation: 51.2 percent
    - High Oil Price: 38.8 percent
  - Probability of real GDP growth falling below zero:
    - Baseline: 38 percent
    - Yen Appreciation: 34.5 percent
    - High Oil Price: 35.1 percent
  - Probability of real GDP growth above 1.5 percent:
    - Baseline: 28.3 percent
    - Yen Appreciation: 34.7 percent
    - High Oil Price: 32.4 percent
- Scenario-specific effects:
  - Yen appreciation to ¥100/USD in 2019Q4 reduces the likelihood of reaching the 2 percent inflation target to 27 percent for both headline and core inflation and raises the probability of deflation by 2023Q4 to about 51 percent.
  - Oil prices rising to $100/barrel in 2019Q4 make reaching the inflation target more likely in the near-term but decrease the medium-term likelihood of reaching 2 percent to 31 percent for both headline and core inflation; headline deflation likelihood is unaffected.

### Stress tests and risk assessment highlights
- Stress tests consider shocks to primary balance, real GDP growth, real interest rate, real exchange rate, combined macro-fiscal shock, and contingent liability shocks.
- Under various stress tests, gross nominal public debt and public gross financing needs increase relative to baseline, with visual results shown for 2019–2024 in the DSA charts.
- Risk assessment benchmarks and heat map indicators identify vulnerabilities in debt profile, gross financing needs, market perception (bond spreads), external financing requirements, short-term debt share changes, public debt held by non-residents, and contingent liability exposures.

### Countercyclical Capital Buffer (CCyB) activation guidance
- Background facts:
  - CCyB applies only to internationally-active banks in Japan.
  - CCyB has remained at 0 percent since it was introduced on March 31, 2016.
- Indicators supporting CCyB activation:
  - BIS credit-to-GDP gap reached its highest level since the early 1990s; by BCBS (2010) guidance, CCyB should have been activated when the credit-to-GDP gap breached the lower threshold in 2016Q3 and should now be set to 2.5 percent after the upper threshold was breached in 2018Q4.
  - A financial gap that accounts for housing and equity market overvaluation as well as excess credit growth has reached its highest level since the early 1990s, indicating elevated medium run growth at risk (GaR).
  - Bank lending standards have eased steadily for loans to households and firms of all sizes since the policy interest rate approached its effective lower bound in the late 1990s, indicating broad-based deterioration in credit quality.
  - Aggregate regulatory bank capital ratios have risen steadily since the GFC and remain around the midpoints of ranges across the ten-largest advanced economies; the simple leverage ratio for the aggregate banking system has fallen slightly, remaining near the bottom of its range across major advanced economies—partly due to higher central bank reserves and possibly compression of risk weights as the credit cycle has matured.

*Source: IMF staff.*

### 3. Recommendation. The Japanese Financial Services Agency should consider activating the

### 3. Recommendation

### Policy recommendation: Activate and expand the CCyB
- The Japanese Financial Services Agency (FSA) should consider activating the CCyB to build up the resilience of the banking sector to rising systemic risk as the credit and financial cycles mature.
- The FSA should consider expanding the scope of coverage of the CCyB to the domestic credit exposures of all domestic banks, including those regional banks that are not internationally active, some of which face capital adequacy challenges.

### Quantitative scenario analysis and simulation results
- Scenario analysis using the Global Macrofinancial Model (GFM) documented in Vitek (2018) indicates that a 50-basis point increase in the CCyB phased in over one year applicable to the entire banking sector would only slightly reduce bank credit and output growth in Japan, even with the policy interest rate constrained by its effective lower bound.
- Figure 1 referenced in the text presents:
  - Credit and financial gap indicators (including BIS credit to GDP gap, BCBS lower and upper CCyB thresholds, GaR financial gap).
  - Bank lending standards series for loans to households, small firms, medium firms, and large firms.
  - CCyB activation simulation series showing consumer price inflation, output growth, bank credit growth, and CCyB.
  - International capital adequacy comparison series showing regulatory capital ratio, Regulatory Tier I capital ratio, and simple leverage ratio.

### Key analytical takeaways
- A targeted, phased 50-basis point CCyB across the entire banking sector is modeled to have only modest adverse effects on bank credit and output growth under the GFM simulation, even when monetary policy is constrained by the effective lower bound.
- Expanding CCyB coverage to include domestic-only and regional banks would address capital adequacy vulnerabilities in segments of the domestic banking sector that are not internationally active.

*Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1jpnea2020001.pdf.*

### 2. The large increase in

### 2. The large increase in corporate net saving

### Drivers of the increase in corporate net saving
- Main attribution: rise in net property income and a fall in the labor share.
- Net property income:
  - Increase occurred mostly in the 1990s.
  - Related to (i) corporate deleveraging, and (ii) progressively lower interest rates as monetary policy was loosened.
- Labor share:
  - Fall occurred from the late 1990s to the mid-2000s.
  - Timing linked to the 1995-96 labor market reforms which expanded (cheaper) non-regular employment.
- Investment:
  - Abstracting from cyclical developments (e.g., a strong increase at the time of the real estate bubble), investment did not contribute markedly to changes in net corporate saving.

### Quantitative assessment and sectoral contributions (Japan)
- Charted contributions (cumulative, in percent of corporate value-added) include series for:
  - Labor compensation
  - Taxes & subsidies on production
  - Corporate income tax
  - Net property income
  - Transfers
  - Investment
  - Net saving
- Japan: Gross Saving minus Investment (in percent of GDP) presented for Corporates, Households, Government, and Total Economy.
- Sources cited: AMECO database; Chen et al (2017) online database; OECD national accounts dataset.

### Link between corporate saving and top-income inequality
- Co-movement:
  - Both corporate gross saving (% of GDP) and the top 10% income share show sharp increases from the beginning of the 1990s to the mid-2000s.
- Temporary divergence:
  - The real estate bubble likely boosted income from rents outside the corporate sector for wealthy real estate owners, causing a temporary divergence between corporate saving and top-income inequality.
- Cross-country observation:
  - In Japan, households partially offset higher corporate saving, whereas in Germany household saving was little changed despite a strong increase in corporate saving.
- Possible explanations for Japan–Germany difference:
  - Demographics: Japan is at a more advanced stage of population aging than Germany.
  - Credit access: Credit to the private sector was 107 percent of GDP in 2017 in Japan, compared to 77 percent in Germany, which may have facilitated consumption smoothing in Japan.
- Data sources: AMECO database; World Inequality Database.

### External sector assessment (selected findings relevant to saving and external balances)
- Overall assessment (2019): The external position is preliminarily assessed as broadly in line with the level implied by medium-term fundamentals and desirable policies.
- Policy context:
  - Continued accommodative stance by the Bank of Japan is consistent with reflation objectives but needs to be accompanied by bold structural reforms and a credible and specific medium-term fiscal consolidation plan.
  - Recommended structural reforms and policies to support domestic demand: boost wages, increase labor supply, reduce labor market duality, reduce barriers to entry in some industries, accelerate agricultural and professional services sector deregulation.
- Foreign asset and liability position:
  - NIIP remained at about 60 percent of GDP over 2014–18, with assets reaching 182 percent and liabilities reaching 121 percent in 2018.
  - Japan holds the world’s largest stock of net foreign assets, valued at US$3.03 trillion at end-2018.
  - 2018 (% GDP) figures: NIIP: 61.0; Gross Assets: 181.9; Debt Assets: 87.7; Gross Liab.: 120.9; Debt Liab.: 79.6.
  - NIIP generated net annual investment income of 3.8 percent of GDP in 2018.
  - Medium-term projection: NIIP projected to rise to about 67 percent with CA surpluses before gradually stabilizing due to population aging.
- Current account (CA):
  - Background: CA surplus reflects high corporate gross saving exceeding domestic investment and a sizable income balance owing to Japan’s large NFA position.
  - Recent path: CA surplus rose since 2014, reaching 3.5 percent of GDP in 2018 and an estimated 3.3 percent in 2019.
  - Income balance contribution: estimated at 3.8 percent of GDP in 2019.
  - Drivers: Lower energy prices underpinned 2014–17 CA increase; higher energy prices lowered the CA surplus in 2018. For 2019, despite lower energy prices, the CA surplus decreased to 3.3 percent of GDP as exports decreased more than imports.
  - Medium-term projection: CA balance projected to slightly increase to about 3.5 percent of GDP.
- 2019 EBA-based assessment and staff estimates:
  - 2019 estimates (% GDP): Projected CA: 3.3; Cycl. Adj. CA: 3.1; EBA CA Norm: 3.4; EBA CA Gap: -0.3; Staff Adj.: 0.0; Staff CA Gap: -0.3.
  - Staff estimates a 2019 CA norm range between 2.2 and 4.6 percent of GDP.
  - The 2019 CA gap midpoint is preliminarily assessed to be -0.3 percent of GDP (with the CA gap range between –1.5 and 0.9), suggesting the underlying CA is in line with fundamentals and desirable policies.
  - Large unexplained portion of the EBA CA gap suggests important bottlenecks to investment and consumption remain, including entry barriers to entrepreneurship and corporate savings’ distortions.
- Real exchange rate (REER):
  - Background: After appreciating during 2014–16, average REER depreciated during 2016–18; 2018 average REER stood at its 2014 level.
  - Estimates through November 2019 show the REER appreciated by 2.5 percent relative to end-2018.
  - EBA REER Level and Index models estimate the 2019 average REER to be 12 to 17 percent lower than the level consistent with fundamentals and desirable policies, but models leave large unexplained gaps due to Japan-specific factors.
  - Using staff methodology (semi-elasticity 0.14 and preliminary 2019 EBA CA gap range) yields an indicative 2019 REER gap range of between –7 and 11 percent with a midpoint of 2 percent.
- Capital and financial accounts (2018–19):
  - Portfolio outflows continued during most of 2018, faster than in 2017, as institutional investors diversified overseas (mostly to Europe).
  - Net FDI and portfolio flows: 2.7 and 1.8 percent of GDP in 2018, respectively; other investments (net) recorded inflows of 1.3 percent of GDP.
  - Net short yen positions prevailed between June 2018 and July 2019.
  - Assessment: Vulnerabilities are limited; inward investment tends to be equity-based; home bias of Japanese investors remains strong.
- FX intervention and reserves:
  - Reserves are about 25 percent of GDP.
  - No FX intervention in recent years (last occurring in 2011).
  - Assessment: Exchange rate is free floating; interventions are isolated and intended to reduce short-term volatility and disorderly exchange rate movements.

### Policy implications and recommended responses
- Macro and structural policy package to keep external position aligned with fundamentals:
  - Proceed with gradual fiscal consolidation, anchored by a credible medium-term fiscal framework.
  - Implement structural reforms to support domestic demand and address investment/consumption bottlenecks:
    - Boost wages.
    - Increase labor supply.
    - Reduce labor market duality.
    - Reduce barriers to entry in some industries.
    - Accelerate deregulation in agricultural and professional services sectors.
- Financial stability and capital flow considerations:
  - Monitor portfolio and FDI outflows as they affect financial account dynamics and could offset domestic financial tightening in the region.
  - Maintain awareness of valuation risks from currency composition of foreign assets (about half of portfolio investment denominated in U.S. dollars).

*Prepared by IMF staff; figures and assessments as reported in the source content.*

### 1.      Japan’s Cabinet Office released its revised medium- to long-term economic and fiscal

### 1jpnea2020001 - 1.      Japan’s Cabinet Office released its revised medium- to long-term economic and fiscal

### Medium- to long-term projections (Cabinet Office, January 17)
- Projections are revised biannually and show medium- to long-term paths of GDP growth and the primary balance of central and local governments under two scenarios.
- “Economic Growth Achieved Case”:
  - Real GDP growth is projected to rise to around 2 percent in the early 2020s.
  - The primary balance is projected to reach -0.5 percent of GDP in FY2025—the target year for achieving a primary surplus—and will turn positive in FY2027.
- “Baseline Case”:
  - Real GDP growth is projected to decline gradually from 1.5 percent in FY2022 to 0.8 percent in FY2029.
  - The primary balance is projected to remain in deficit throughout the projection period (attaining -1.3 percent of GDP in FY2029).

### Fiscal developments: budgets and stimulus
- The Cabinet submitted:
  - Draft supplementary budget for Fiscal Year 2019.
  - Draft initial budget for Fiscal Year 2020 to the Diet on January 20.
- Budget amounts:
  - Initial budget amounts to ¥102.7 trillion (about 18.2 percent of GDP).
  - Additional expenditures in the supplementary budget amount to ¥4.5 trillion (about 0.8 percent of GDP).
- Use of budgets:
  - Financing for most measures listed in the December 2019 economic stimulus package.
  - Measures include disaster recovery spending following Typhoons Faxai and Hagibis (September-October 2019).
  - Measures to support private consumption (operating from September 2020 to March 2021) utilizing the Individual Number Card.
- Comprehensive Economic Measures approved in December:
  - Fiscal expenditures around 13 trillion-yen.
  - Three pillars: (i) restoration and reconstruction from natural disasters and ensuring safety and security, (ii) intensive support for those striving to overcome economic downside risks, (iii) investing for a future and maintaining/enhancing economic vitality beyond the 2020 Tokyo Olympics and Paralympics.

### Monetary policy (BOJ) and inflation
- BOJ Monetary Policy Meeting on January 20-21, 2020:
  - Short-term policy interest rate kept at -10 basis points (bps).
  - Zero-percent yield target for 10-year JGBs unchanged.
  - Modest upward revisions to growth outlook for FY2019 and FY2020 by 20 bps to 0.8 percent and 0.9 percent, respectively, due to additional public spending from the economic stimulus package.
  - Core inflation forecasts revised downward for FY2020 and FY2021 by 10 bps to 1 and 1.4 percent, respectively.
  - BOJ remains committed to achieving its inflation target of 2 percent.
- Inflation readings:
  - CPI headline inflation picked up in December 2019 to 0.8 percent (y/y).
  - BOJ’s core-core inflation (excluding fresh food and energy) picked up in December 2019 to 0.9 percent (y/y).
  - These represent increases of 0.6 and 0.2 percentage points since October, respectively.
- BOJ policy stance:
  - Continue “QQE with Yield Curve Control” aiming to achieve price stability target of 2 percent.
  - Will examine risks relevant to monetary policy including deterioration of financial intermediation function due to impact on profits of financial institutions.
  - BOJ recognizes the current framework is working well and does not see a need for adjustment.

### Recent macro developments: external sector, trade, tourism, financial markets
- Trade and exports:
  - Trade balance turned to a deficit of ¥153 billion (about $43 billion) in December 2019.
  - Exports fell by 6.3 percent (y/y), a thirteenth consecutive monthly decline, due to lingering supply-chain disruptions from October 2019 typhoons and slowdown in trading partners.
- Tourism:
  - Number of tourist arrivals grew by 2.2 percent in 2019 (Japan National Tourist Organization, 17 January), partly due to the Rugby World Cup.
  - Number of tourists visiting Japan recorded a high figure in 2019; revenue from tourism is expected to be the highest ever.
  - Number of tourists from Japan to Korea decreased in Q4 2019 but increased by 11% on an annual basis from the previous year.
- Financial markets (relative to mid-December 2019 / since beginning of 2020):
  - Japanese yen is broadly stable vis-à-vis the U.S. dollar.
  - Japanese equity markets have risen by 0.7 percent since beginning of 2020.
  - Ten-year government bond yield is broadly unchanged at -0.02 percent.

### Financial sector stability and regulatory measures
- Financial sector remains stable.
- Authorities have implemented 2017 FSAP recommendations, including on macroprudential policies and resolution.
- Supervisory actions:
  - Japan Financial Services Agency (JFSA) reviewed Early Warning Mechanism.
  - JFSA and BOJ decided to conduct a stress test on major financial institutions to prepare for major shakeouts in financial markets.
- Policy priorities to address changing environment (digitalization, demographic changes, prolonged low-interest rate):
  - (i) promoting finance digitalization strategy utilizing data,
  - (ii) improving financial services to accommodate various needs,
  - (iii) securing financial intermediation and stability.
- Support for regional financial institutions:
  - Authorities will develop a business environment to establish sustainable business models and urge improvement in management and governance.

### Fiscal strategy and consolidation
- Basic principle: “without economic revitalization, there can be no fiscal consolidation.”
- Three pillars of reform: overcoming deflation and revitalizing the economy, expenditure reforms, and revenue reforms.
- Outcomes highlighted:
  - Japanese economy has grown 13% in the past seven years.
  - Tax revenue forecasts for the next fiscal year’s budget have reached a record high.
  - Public debt issuance on an initial budget has decreased for eight consecutive years since the beginning of the current administration.
- Targets:
  - Aim for the primary surplus of central and local governments by FY 2025.
  - Aim for steady reduction in the debt to GDP ratio.
- Consumption tax:
  - Increased on October 1, 2019 from 8% to 10% as scheduled.
  - Mitigation measures include reduced tax rate, support program for purchases of automobiles and housing, and establishment of point rewards for cashless shopping.
  - GOJ sees overall demand fluctuations due to the tax rate hike are not as large as previous increases; will continue close monitoring.

### Growth strategy and structural reforms
- Abenomics (three arrows): (i) aggressive monetary policy, (ii) flexible fiscal policy, (iii) growth strategy including structural reforms.
- Structural reforms implemented and ongoing:
  - “Work-style reform,” greater labor participation of female and older workers, acceptance of highly-skilled foreign professionals, corporate governance reforms, trade liberalization and FDI promotion.
  - Revision of the Corporate Governance Code in June 2018 and relevant cabinet order in January 2019; private companies reducing cross-shareholdings.
- Authorities’ priority and plans:
  - Basic Policy on Economic and Fiscal Management and Reform 2019 focuses on three pillars; (i) boosting potential growth rate, (ii) expanding virtuous cycle of growth and distribution, (iii) creating a society in which everyone plays an active role and feels secure.
  - Action Plan of the Growth Strategy (June) and Interim Report on the Formulation of a New Action Plan of the Growth Strategy (December).
  - Interim report focuses on promoting investment in new fields, establishing rules for the digital market, reviewing laws and regulations related to fintech and financial sector, responding to changes in social structure of regions and maintaining regional infrastructure.
- Labor market and corporate/regulatory reforms:
  - Work Style Reform Law implemented since April 2019 (correcting long-working hours, diversified and flexible workstyle, equal pay for equal work).
  - Efforts to improve labor participation rate of women and increase in minimum wage.
  - Promote digital market rules, fintech, use of AI, robots, IoT, mobility improvements, and corporate governance enhancement.
- Trade agreements and growth impact:
  - Staff estimated implementation of CPTPP and Japan-EU trade agreements could offset up to 4 percent of demographic-related slowdown in real GDP growth.
  - Japan-US trade agreement came into effect this month and is considered a major achievement.
  - GOJ will further promote open, rule-based multilateral trade and investment, including RCEP negotiation.
- Foreign investment and national security:
  - Amendment to the Foreign Exchange and Foreign Trade Act in November aims to address foreign investment posing national security risks.
  - GOJ working on implementing rules; details still under consideration.

### Climate change and energy policy
- Focus on climate change adaptation to enhance resilience, informed by severe typhoon damage.
- Promote disaster prevention and mitigation policies and land resilience (use of dams, embankments).
- Japan’s mitigation record:
  - Aiming for INDC under Paris Agreement: 26% reduction from FY2013 in FY2030.
  - GHG emissions reduced for the fifth consecutive year since FY2014 (about 11.8%).
  - CO2 marginal reduction cost is relatively high.
- Carbon pricing and taxes:
  - GOJ has imposed certain tax for climate change mitigation on fossil fuels based on CO2 emissions, in addition to taxes on fossil fuels across broad sectors (industry, electricity-generation and transportation).
  - Carbon pricing including carbon tax intensively discussed from professional and technical viewpoints considering international competitiveness and international debate.

### External sector assessments and methodology concerns
- Reducing excess global imbalances is critical to sustain global growth; importance of refining the EBA methodology emphasized.
- Authorities agree projected 2019 CA balance is broadly in line with fundamentals and desired policies.
- Authorities concerned about aspects of the EBA methodology and seek continued discussion with staff to improve Fund evaluation methods and structural policy recommendations.
- On export control operation review (three items: hydrogen fluoride, resists, and fluoride polyimide):
  - Aim is to maintain effectiveness with regards to goods and technologies divertible to military use under non-proliferation responsibilities.
  - Exports not restricted when verified as legitimate private transactions under rigorous examination.
  - Export of hydrogen fluoride to Korea accounts for less than one percent of total trade value between Japan and Korea in 2018; macroeconomic impact is negligible.
  - Authorities state it is inappropriate to inordinately accentuate the export control operation review in the Article IV consultation report and that the IMF should discuss macro-critical issues.

### Supply-side of corruption and AML/CFT
- Authorities acknowledge importance of tackling corruption and AML/CFT.
- Actions taken:
  - Steady efforts including relevant law amendments.
  - Based on Phase 4 recommendations by OECD Working Group on Bribery (adopted last June), GOJ continues necessary measures.
  - Continued work on AML/CFT in light of forthcoming FATF fourth review for Japan.

*Statement by Takuji Tanaka, Executive Director for Japan; Ken Chikada, Alternate Executive Director; and Koki Harada, Senior Advisor to the Executive Director — January 30, 2020*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1jpnea2020001.pdf_