## 1jpnea2022001

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### Recent economic developments and macrofinancial position
- Real GDP growth:
  - -4.5 percent in 2020.
  - 1.6 percent in 2021 (estimated).
- Inflation and prices:
  - Average CPI inflation was -0.3 percent in 2021.
  - Inflation rose gradually during 2021 reflecting high energy prices but remains well below the 2 percent inflation target.
  - Headline CPI inflation projected at 1.0 percent in 2022.
- External sector:
  - Current account surplus was 2.9 percent of GDP in 2021.
  - On a preliminary basis, the external position in 2021 is assessed as broadly in line with medium-term fundamentals and desirable policies.
- Financial sector and credit:
  - Business bankruptcies and non-performing loans are at historical lows due to strong fiscal and monetary support and liquidity and credit supply facilitated by regulatory easing measures.
  - Banking system: well-capitalized and liquid; near-term vulnerabilities are contained.
  - Non-performing loans (NPLs) as of end-September 2021: 0.73 percent for major banks and 1.81 percent for regional banks.
  - Capital adequacy: total capital ratio ranged from 9.9 percent for domestically-active regional banks to 17.5 percent for internationally-active large banks, as of end-September 2021.
- Labor market and scarring:
  - Significant scarring effects are unlikely as strong policy support has kept unemployment low.
- Demographics:
  - An ageing and declining population will continue to weigh in the medium to long term.

### Outlook and staff projections
- GDP projections:
  - GDP growth projected at 2.4 percent in 2022.
  - Table 1 projections: Real GDP 2.4 percent in 2022 and 2.3 percent in 2023.
  - Medium-term: real GDP growth projected to converge to potential of 0.5 percent; 2024 0.8; 2025 0.7; 2026 0.5; 2027 0.4.
- Demand composition:
  - Consumption expected to lead the recovery, with pent-up demand being unwound.
  - Investment expected to bounce back as uncertainty and supply constraints subside.
- Inflation and external projections:
  - Headline CPI inflation projected at 1.0 percent in 2022 and 0.8 percent in 2023.
  - Current account surplus projected to narrow to 2.4 percent of GDP in 2022 and remain around 3 percent of GDP over the medium term.
- Key macro statistics (selected, exact figures):
  - Nominal GDP: US$ 4,937 Billion (2021).
  - GDP per capita: US$ 39,340 (2021).
  - Population: 126 Million (2021).
  - Real GDP growth: 2019 -0.2; 2020 -4.5; 2021 1.6; 2022 2.4; 2023 2.3.
  - Headline CPI: 2019 0.5; 2020 0.0; 2021 -0.3; 2022 1.0; 2023 0.8.
  - Current account balance (percent of GDP): 2019 3.4; 2020 3.0; 2021 2.9; 2022 2.4; 2023 2.7.

### Fiscal policy stance, outcomes, and recommendations
- Fiscal outcomes (2021 exact figures):
  - General government revenue 35.5 percent of GDP.
  - General government expenditure 43.2 percent of GDP.
  - Overall balance -7.6 percent of GDP.
  - Primary balance -7.0 percent of GDP.
  - Public debt, gross 263.1 percent of GDP (2021) / alternative series: Gross debt 263.1 (2021) and listed elsewhere as 259.0 (2021) and 263.1 (2022) — figures appear across tables.
- Fiscal response size and composition:
  - Total above-the-line (ABL) measures estimated at 103.0 trillion JPY (18.5 percent of 2022 GDP).
  - Breakdown by package (In trillion JPY): 32.0; 13.6; 18.8; 26.3; 12.3 — Total 103.0.
  - Composition totals (In trillion JPY): Health-related measures 15.5; Support to households 28.9; Job retention programs 5.2; Support to firms 26.7; Public investments 13.0; Others/Unallocated 13.7; Total 103.0.
  - Weighted-average multiplier for ABL measures: about 0.3. Cumulative output impact estimated at about 31 trillion JPY (about 5 ½ percent of 2022 GDP).
- Recommendations:
  - Near-term fiscal policy should remain flexible and supportive until recovery is entrenched while increasingly shifting toward more targeted measures.
  - A well-specified medium-term fiscal consolidation strategy is needed to preserve growth, put public debt on a downward path, and strengthen the ability to respond to shocks.
  - Rebuild fiscal buffers gradually in a growth-friendly manner.
  - Consider revenue options: increase the consumption tax standard rate; strengthen property taxation; rationalize allowances and deductions; increase capital income tax rate — accompanied by countermeasures to mitigate distributional impacts.

### Monetary policy, BoJ actions, and financial stability guidance
- Monetary stance and BoJ measures:
  - Accommodative monetary policy remains appropriate given low underlying inflation.
  - BoJ’s QQE with Yield Curve Control framework maintained since September 2016.
  - March 2021 adjustments: removed ETF/J-REIT annual purchase targets (retained ceilings), clarified +/- 25bps band around 10-year JGB yield target, introduced new interest rate scheme to promote lending.
  - BoJ balance sheet increased by 22 percent y/y in 2020 driven by loans to firms; BoJ expanded purchases of commercial paper and corporate bonds from 5 to 20 trillion yen; special funds-supplying operations expanded (¥25 trillion); new fund-provisioning measure for SMEs (¥30 trillion).
  - BoJ launched Climate Response Financing Operations offering zero interest loans for climate-related lending (launched December 2021).
- Financial stability and supervisory guidance:
  - Financial Services Agency (FSA) allowed regulatory flexibilities during pandemic (zero risk weights for guaranteed loans, draw down regulatory capital, liquidity coverage below minimum).
  - FSA and BoJ urged to strengthen supervision, broaden systemic risk assessment, and enhance macroprudential toolkit.
  - Pandemic-related financial support should be gradually phased out and shifted to targeting viable but illiquid firms; public credit guarantee ratio should be lowered from current 80-100 percent.
  - Support for balance sheets of smaller firms should continue until uncertainty fades, with caution to avoid masking vulnerabilities.
- Monetary policy refinements suggested by staff:
  - Steepen JGB yield curve by shifting the yield target from 10-year to a shorter maturity.
  - Increase fraction of bank reserves subject to negative rates (noted constraint: around 4 percent of bank reserves subject to negative rates as of December 2021).
  - Measures to reduce cash usage (cashless incentives, reduce high denomination notes, require banks to cover cash transport costs).

### Structural policies and reform priorities
- Growth and productivity reforms:
  - Leverage digital and green transformation to promote strong, sustainable, and inclusive growth.
  - Reinvigorate reforms to increase labor supply, boost productivity, and support investment to lift potential growth.
- Labor market and inclusion:
  - Accelerate reforms to increase labor supply, productivity, and wages, particularly of female and older workers.
  - Further expand access to affordable and high-quality childcare; enhance flexible work arrangements; incentivize gender-balanced management.
  - Policies to avoid job displacement of unskilled workers during digital transition.
- Corporate and regulatory reforms:
  - Broaden and deepen corporate governance and regulatory reforms to improve business dynamism and spur investment (Corporate Governance Code revision June 2021).
  - Encourage exit of unviable SMEs and facilitate entry of higher-potential firms; incentivize alternative financing (asset-based lending, venture capital).
- Climate and green initiatives:
  - Japan committed to net greenhouse gas emissions of zero by 2050.
  - Medium-term target: emissions reduction of 46 percent relative to fiscal year 2013 levels in fiscal year 2030.
  - Policy tools: JPY2 trillion Green Innovation Fund; BoJ climate credit facility; green finance promotion and corporate disclosure improvements.
  - Staff recommends combining green investment with a gradual rise in carbon prices and compensatory transfers financed partly by carbon revenues.

### Digitalization and financial innovation
- Digital gaps and policy actions:
  - Uptake of online government services below 10 percent; government established Digital Agency.
  - Priorities: improve online administrative procedures, promote My Number digital ID linkage to bank accounts, deregulate online medical services and education, tax credits for business digitalization.
  - BoJ evaluating CBDC research; no immediate plan to issue a CBDC.
- Financial sector digital priorities:
  - Promote cashless payments (government target: raise share of cashless payments to 40 percent by 2025).
  - FSA adoption of Financial Digitalization Strategy (2018); fintech hubs; Payment Services Act amendment reducing inter-bank fund transmission fees (from October 2021).

### Risks, scenarios, and contingency planning
- Near-term risks:
  - Outbreaks of lethal and highly contagious Covid-19 variants.
  - Escalation of the Ukraine conflict (commodity prices, supply-chain disruptions, cyber-attacks).
  - Sharper-than-expected slowdown in China impacting external demand.
- Cross-border and policy divergence risks:
  - Uneven recoveries and faster-than-expected monetary tightening abroad could weaken the yen further or cause volatility.
  - Sharp tightening of global financial conditions could weigh on Japan’s recovery and crystallize macro-financial risks.
- Medium-term risks:
  - Labor market rigidities, delayed exit of unviable firms, and buildup of zombie firms from untargeted support.
  - Debt sustainability concerns and excessive risk taking by financial institutions under prolonged low yields.
- Risk matrix highlights (selected; likelihood/time horizon/impact):
  - Extended global supply chain disruptions: Likelihood High; Time Horizon ST, MT; Expected Impact High.
  - Outbreaks of variants: Likelihood High; Time Horizon ST; Expected Impact High.
  - Geopolitical tensions and de-globalization: Likelihood High; Time Horizon ST, MT; Expected Impact Medium.
  - Bond market stress from reassessment of sovereign risk: Likelihood Low; Time Horizon ST, MT; Expected Impact High.

### Debt Sustainability Analysis (DSA) and stress tests — key findings
- Baseline and assumptions:
  - DSA time horizon extended to 2031 to analyze demographic headwinds.
  - Growth converges to potential of around 0.5 percent over medium term; potential declines to 0.3 percent by 2030.
  - Primary deficit projected to remain high at 7½ percent of GDP in 2022, decline to around 2 percent in 2024, and increase to about 3 percent of GDP in 2031 due to health and long-term care spending.
  - Nominal interest rate on 10-year JGBs assumed to reach 2 percent by 2030.
- Debt profile and financing:
  - Share of short-term debt rose in 2020 and fell by 2.5 percentage points in 2021 but remains high relative to pre-COVID.
  - Share of JGBs held by foreign investors about 13 percent in 2021.
  - Financial-assets-to-GDP ratio rose to 97 percent in 2020 and projected to decline to 87 percent near-term.
  - Gross financing needs (GFN) expected at 62 percent of GDP in 2022, falling below 55 percent over the medium term.
- Stress test scenario impacts (selected results):
  - Primary balance shock: gross debt-to-GDP ratio higher by around 3 percent of GDP in 2027 relative to baseline.
  - Growth shock: debt ratio about 277 percent of GDP in 2027—around 15 percentage points higher than baseline.
  - Interest rate shock: debt-to-GDP ratio higher by around 6 percentage points in 2027; GFN about 4 percentage points higher.
  - Interest rate and contingent liability shock (largest): debt ratio around 284 percent of GDP in 2027—about 22 percentage points higher than baseline; GFN about 7 percentage points higher.
- Policy implications from DSA:
  - Prepare contingency plans for unfavorable macro-financial developments.
  - Adopt a credible, well-specified medium-term fiscal framework to anchor debt trajectory.
  - Maintain monetary accommodation until inflation is sustainably at or above target while pursuing fiscal consolidation over the medium term.

### Health response to the pandemic (Annex I highlights)
- Vaccination and boosters:
  - By December 1, 78 percent of the population was fully vaccinated.
  - Booster rollout began in December 2021; by March 3, 23 percent of the population were boosted.
  - Booster rollout accelerated to above 1 million doses per day in early March 2022.
- Containment measures:
  - States of Emergency (SoEs) declared multiple times in 2021; quasi-SoE measures applied in Q1 2022.
  - SoEs were less restrictive than in other countries; strategy relied on voluntary compliance, mask wearing, and targeted contact-tracing.
- Outcomes:
  - Japan minimized COVID-related mortality with one of the lowest mortality rates among advanced economies.
  - Omicron wave in early 2022 led to record infections with daily case counts above 100,000 and hospitalizations and deaths surpassing previous peaks.

### Fiscal response to the pandemic — size, multipliers, and impact (Annex III highlights)
- Total ABL measures: 103.0 trillion JPY (18.5 percent of 2022 GDP).
- Multipliers used (staff estimates):
  - Overall weighted-average multiplier: 0.3.
  - Health-related measures: multiplier = 0.3.
  - Support to households: multiplier = 0.2.
  - Job retention scheme: multiplier = 0.2.
  - Support to firms: multiplier = 0.15.
- Estimated macroeconomic impact:
  - Cumulative impact on output relative to no measures: about 31 trillion JPY (about 5 ½ percent of 2022 GDP).
  - Employment Adjustment Subsidy increased disbursements by about ½ percent of GDP in both 2020 and 2021 relative to 2019.

### Climate, green finance, and transition policies
- Commitments and strategy:
  - Net-zero by 2050 commitment.
  - April 2021 target: emissions reduction of 46 percent relative to FY2013 levels by FY2030.
  - JPY2 trillion Green Innovation Fund and BoJ climate-related lending measures.
- Staff recommendations:
  - Align near-term fiscal stimulus with climate objectives (prioritize climate-resilient infrastructure and green energy).
  - Combine green energy investment with gradual carbon pricing and compensatory transfers financed partly by carbon revenues.
  - Improve climate disclosures and develop green taxonomies; publish supervisory guidance on climate financial risks.
- BoJ climate measures:
  - Fund-provisioning measure (launched December 2021): zero interest loans to financial institutions for climate-related loans; reserves exemption from negative interest rate corresponding to twice amount funded.

### Financial sector reform and supervisory progress (Annex X highlights)
- Progress on 2017 FSAP recommendations:
  - Corporate Governance Code revised June 2021 (increased number/share of independent directors for Prime Market listed companies).
  - FSA published “Principles of Prudential Policy” March 2019 and advanced supervisory guidelines.
  - FSA and BoJ conducting common stress tests for major financial institutions since 2019; liquidity stress testing for foreign currency exposures ongoing.
  - FSA revamped “Early Warning Mechanism” to function similarly to Pillar 2 buffers and to monitor medium-term profitability concerns.
  - Insurance solvency reforms targeted for field testing and finalization with new regime from 2025.
  - Measures to support regional banks: Special Deposit Facility, grants for merger/business integration, amendments to Banking Act to allow diversification (effective late 2021).

### Staff appraisal — consolidated policy guidance
- Near term:
  - Maintain flexible, supportive fiscal policy and stand ready to act nimbly given evolving risks (pandemic, Ukraine conflict).
  - Accommodative monetary policy remains appropriate; refine framework and communicate clearly.
  - Scale down pandemic-related financial support as conditions permit and target viable but illiquid firms.
  - Strengthen financial supervision and broaden systemic risk assessment.
- Medium to long term:
  - Implement a well-specified medium-term fiscal consolidation strategy to put public debt on a downward path while preserving growth.
  - Accelerate structural reforms to raise labor supply, productivity, and wages (especially female and older workers).
  - Leverage digital and green transformations; consider carbon pricing complemented by compensatory transfers.
  - Improve digital adoption, financial and digital literacy, and cybersecurity to ensure an inclusive digital transition.

*Source: IMF Staff Report for the 2022 Article IV Consultation with Japan (March 16, 2022).*

### 4.5 percent in 2020, real GDP growth is estimated to have grown by 1.6 percent in 2021.

### 1jpnea2022001 - 4.5 percent in 2020, real GDP growth is estimated to have grown by 1.6 percent in 2021.

### Recent economic developments and macrofinancial position
- Real GDP growth:
  - -4.5 percent in 2020.
  - 1.6 percent in 2021 (estimated).
- Inflation and prices:
  - Inflation rose gradually during 2021 reflecting high energy prices but remains well below the 2 percent inflation target.
  - Average CPI inflation was -0.3 percent in 2021 (one-off factors noted, e.g., sharp drop in mobile phone charges).
  - Headline CPI inflation projected at 1.0 percent in 2022.
- External sector:
  - Current account surplus was 2.9 percent of GDP in 2021.
  - On a preliminary basis, the external position in 2021 is assessed as broadly in line with medium-term fundamentals and desirable policies.
- Financial sector and credit:
  - Business bankruptcies and non-performing loans are at historical lows due to strong fiscal and monetary support and liquidity and credit supply facilitated by regulatory easing measures.
  - The banking system remains well-capitalized and liquid; near-term vulnerabilities are contained.
- Labor market and scarring:
  - Significant scarring effects are unlikely as strong policy support has kept unemployment low.
- Demographics:
  - An ageing and declining population will continue to weigh in the medium to long term.

### Outlook and projections (staff projections and risks)
- GDP projections:
  - GDP growth projected at 2.4 percent in 2022 amid continued strong policy support, the high vaccination rate, and easing global supply constraints.
  - Table 1 projections: Real GDP 2.4 percent in 2022 and 2.3 percent in 2023.
- Demand composition:
  - Consumption expected to lead the recovery, with pent-up demand being unwound.
  - Investment seen to bounce back as pandemic-related uncertainty and supply constraints subside.
- Headline inflation and drivers:
  - Inflation expected to pick up, spurred by higher import prices and stronger domestic demand; headline CPI inflation projected at 1.0 percent in 2022.
- Downside risks:
  - Higher commodity prices and elevated uncertainty related to the Ukraine conflict will slow domestic demand recovery.
  - External demand likely affected by geopolitical tensions, mainly due to an expected slowdown in Europe.
  - Uncertainty around the pandemic and the war in Ukraine pose significant downside risks.
- Medium-term constraints:
  - An ageing and declining population will continue to weigh on potential growth.

### Fiscal policy assessment and recommendations
- Current fiscal stance and outcomes:
  - General government revenue 35.5 percent of GDP (2021).
  - General government expenditure 43.2 percent of GDP (2021).
  - Overall balance -7.6 percent of GDP (2021).
  - Primary balance -7.0 percent of GDP (2021).
  - Public debt, gross 263.1 percent of GDP (2021).
- Recommendations:
  - Near-term fiscal policy should remain flexible and supportive until the recovery becomes entrenched, while increasingly shifting toward more targeted measures.
  - A well-specified medium-term fiscal consolidation strategy is needed to preserve growth, put public debt on a downward path, and strengthen the ability to respond to shocks.
  - Fiscal buffers should be rebuilt gradually over the medium and long term in a growth-friendly manner.

### Monetary policy and financial stability guidance
- Monetary stance:
  - Accommodative monetary policy remains appropriate.
  - Given that the effective lower bound is a constraint for Japan, comprehensive and mutually reinforcing fiscal, monetary, and structural policies are essential to provide the necessary support to lift inflation durably to its target.
- Recommendations and supervisory actions:
  - Further refinements to the monetary policy framework could help safeguard financial stability; clear communication would enhance effectiveness.
  - Financial supervision should remain vigilant; pandemic-related financial support should be scaled down as the pandemic recedes.
  - Authorities urged to further strengthen financial supervision and regulation, broaden systemic risk assessment, and enhance the macroprudential policy toolkit.
  - The Bank of Japan (BoJ) should maintain monetary accommodation while taking further measures to make that stance more sustainable.
  - Support for balance sheets of smaller firms should continue until uncertainty about the pandemic fades, with care to avoid masking vulnerabilities.

### Structural policies and reform priorities
- Growth and productivity:
  - Digital and green transformation could be leveraged to promote strong, sustainable, and inclusive growth after the pandemic.
  - Reinvigorating reforms to increase labor supply, boost productivity, and support investment would lift potential growth and facilitate reflation.
- Labor market and inclusion:
  - Directors called for acceleration of reforms to increase labor supply, productivity, and wages, particularly of female and older workers.
  - Avoid job displacement of unskilled workers to ensure an inclusive digital transition.
- Corporate and regulatory reforms:
  - Corporate governance and regulatory reforms should be broadened and deepened to improve business dynamism and spur investment.
- Climate and digital initiatives:
  - Directors welcomed Japan’s carbon neutrality commitment and noted the important role that carbon pricing could play; highlighted need for further efforts to deliver on related targets.
  - Recent initiatives to promote digitalization and establish the centralized Digital Agency should help accelerate digitalization.

### Executive Board views (summary)
- Commendations and cautions:
  - Executive Directors commended authorities’ strong policy support and steady vaccine rollout progress supporting the recovery.
  - Directors stressed uncertainty from the pandemic and the war in Ukraine and the importance of raising productivity and achieving inclusive and sustainable growth.
- Policy balance:
  - Emphasized flexible, supportive near-term fiscal policy transitioning to targeted measures and medium-term consolidation.
  - Agreed accommodative monetary policy remains appropriate while refining the framework and communicating clearly.
  - Encouraged scaling down pandemic-related financial support as conditions permit and strengthening financial supervision given prolonged low interest rates and demographic pressures.
- Structural priorities:
  - Encouraged leveraging digital and green transformations, widening corporate governance and regulatory reforms, and accelerating labor supply and productivity-enhancing reforms.

*Source: IMF Staff Report for the 2022 Article IV Consultation with Japan (March 16, 2022).*

### 5.      Japan’s fiscal policy response to the pandemic has been exceptionally strong, helping

### 5.      Japan’s fiscal policy response to the pandemic has been exceptionally strong, helping

### Fiscal response and near-term outcomes
- The Government of Japan adopted three large supplementary budgets in FY2020 (April 2020-March 2021), leading to a jump in the primary deficit from 2.4 percent of GDP in 2019 to 8.3 percent of GDP in 2020 and 7 percent of GDP in 2021.
- Measures aimed to provide relief to households, maintain employment, and provide credit lines for firms.
- Under the new Kishida administration, another fiscal package was announced in November 2021 (the third stimulus package, ¥79 trillion).
- In March 2022, the government expanded the fuel subsidy: the package included a subsidy for wholesalers of gasoline and other fuels, with a ceiling of 5 JPY per liter activated in January 2022; the ceiling was increased in March to 25 JPY per liter, financed by the Reserve Fund.
- Earlier pandemic-era fiscal actions cited:
  - April 2020: first stimulus package, partly revised on April 20 (¥117 trillion after revision).
  - May 2020: second FY2020 supplementary budget (¥117 trillion).
  - December 2020: the second stimulus package (¥74 trillion).
  - November 2021: third stimulus package (¥79 trillion).

### Monetary policy, liquidity, and credit
- The Bank of Japan (BoJ) facilitated financing for firms, provided ample liquidity (in JPY and USD), and expanded its scale of asset purchases, containing risk premia in asset markets.
- The BoJ’s balance sheet increased by 22 percent y/y in 2020 driven by loans to firms.
- Private sector credit growth increased sharply in 2020, reaching 6.3 percent y/y by end-2020, propelled by precautionary private sector borrowing and regulatory measures and accommodative lending standards by banks.
- The BoJ expanded purchases of commercial paper and corporate bonds from 5 to 20 trillion yen and expanded special funds-supplying operations to support corporate financing (¥25 trillion).
- The BoJ introduced a new fund-provisioning measure to support financing of mainly SMEs (¥30 trillion).
- The BoJ shifted to more targeted support: lowered the ceiling of its corporate debt purchases to its pre-crisis level starting in April 2022 and extended its special program to support financing of SMEs by six months, until September 2022.

### Financial sector health and risks
- The Financial Services Agency allowed banks to assign zero risk weights to loans with public guarantees, draw down regulatory capital, and reduce liquid assets below the minimum liquidity coverage ratio requirement.
- Non-performing loans (NPLs) increased only marginally since March 2020: ticking up to 0.73 percent for major banks and 1.81 percent for regional banks, as of end-September 2021.
- Capital adequacy: total capital ratio ranged from 9.9 percent for domestically-active regional banks to 17.5 percent for internationally-active large banks, as of end-September 2021.
- Bank profitability: the sharp decline in return on assets/equity in 2020 is largely moderated, and profitability levels are close to the pre-pandemic levels as of end-September 2021.
- Precautionary savings and liquidity indicators: private-sector cash, corporate deposits, household deposits, and M1 increased (figures shown in source).
- Policy concerns and recommendations:
  - Untargeted measures may have prolonged the lives of zombie firms or may create new zombies; credit risks may arise if the shock to contact-intensive industries persists.
  - Close monitoring and adequate provisioning of loans are warranted; loan-losses should be provisioned for in a forward-looking manner and NPLs proactively recognized and resolved to avoid resources getting locked in zombie firms.

### Climate, green strategy, and structural priorities
- Japan committed in October 2020 to reduce net greenhouse gas emissions to zero by 2050.
- In April 2021, Japan raised its medium-term target to an emissions reduction of 46 percent relative to fiscal year 2013 levels in fiscal year 2030 (up from earlier goal of 26 percent).
- The government’s green growth strategy includes public funding, tax incentives, changes in regulations and standards, technological innovation, green finance, and international collaboration.
- In July 2021, the BoJ released its climate strategy aimed at managing climate financial risks and supporting green financial markets.

### Outlook, projections, and key macro statistics
- Growth projection: 2.4 percent in 2022 amid continued strong policy support and a high vaccination rate; reflects a contraction in the first quarter and incorporates direct and spillover effects of the Russia-Ukraine conflict.
- Headline CPI inflation is projected at 1.0 percent in 2022.
- The current account surplus is projected to narrow further to 2.4 percent of GDP driven by higher commodity import bills.
- Medium-term outlook:
  - Real GDP growth projected to converge to potential of 0.5 percent.
  - Inflation projected to remain around 1 percent in the medium term, below the BoJ’s 2 percent target.
  - Output gap projected to close by 2024.
  - Current account surplus projected to remain around 3 percent of GDP over the medium term.
- Under current policies, IMF staff projects the primary deficit at 7.4 percent of GDP in 2022.

### Risks and scenarios
- Near-term risks:
  - Outbreaks of new lethal and highly contagious Covid-19 variants could derail services consumption and reduce external demand.
  - Escalation of the Ukraine conflict: significant downside through commodity prices, financial and trade spillovers, supply-chain disruptions (including potential cyber-attacks), and weaker business sentiment.
  - A sharper-than-expected slowdown in China poses downside risk to external demand given close trade ties.
- Cross-border and policy divergence risks:
  - Uneven recoveries and potential policy divergence across major economies could have significant spillovers.
  - Faster-than-expected monetary policy tightening abroad, combined with the BoJ's yield curve control, could weaken the yen further and raise inflation towards the BoJ’s target.
  - Sharp tightening of global financial conditions and a global economic slowdown could weigh on Japan’s recovery and crystalize macro-financial risks.
  - Retrenchment of Japanese financial institutions could have global spillovers given Japan’s large foreign portfolio investment position and banking flows.
- Medium-term risks:
  - Reallocation of resources could be impeded by labor market rigidities and delayed exit of unviable firms.
  - Debt sustainability concerns and excessive risk taking by financial institutions under the low-yield environment could undermine financial stability.

### Authorities’ views and policy guidance
- Authorities broadly agreed with Fund staff’s near-term outlook and risks; projected a rebound of economic activity in 2022 underpinned by fiscal support and pent-up demand.
- Authorities’ medium-term growth projection in the Economic Growth Achieved Case assumed higher TFP growth than staff.
- On inflation, authorities agreed that the recent increase mainly reflected rising commodity prices while underlying price pressures remained weaker than in other advanced economies.
- Policy discussion priorities:
  - (i) maintain supportive and flexible policies and stand ready to act nimbly given the evolving Ukraine conflict and until the pandemic is under control;
  - (ii) address challenges from demographic headwinds;
  - (iii) leverage digital and green investment to promote strong, sustainable, and inclusive growth after the pandemic.
- IMF staff assessment: near-term fiscal policy should be nimble and flexible—including through contingency planning in case of escalation of the Russia-Ukraine conflict—adjusting the scale and composition of support in response to epidemiological, economic, and geopolitical developments.
- Fiscal design critique: the November package could have been better targeted and put more focus on facilitating economic transformation; e.g., eligibility criteria for the cash transfer to child-rearing households could have been tighter with a lower income threshold, and the package could have included further measures to facilitate resource allocation towards sectors with high growth potential and to promote a digital and green recovery.

*Source: 1jpnea2022001*

### 17.      Pandemic-related  financial support should be gradually phased out as the pandemic

### 17.      Pandemic-related  financial support should be gradually phased out as the pandemic recedes

### Phasing out pandemic-related support
- Pandemic-related financial support should be gradually phased out as the pandemic recedes; measures should shift to targeting viable but illiquid firms.
- Timing and pace of the policy shift should be designed not to jeopardize the recovery and entrench scarring.
- Government loan guarantee and concessional loan programs should be scaled down once the recovery takes hold.
- The public credit guarantee ratio should be lowered further from the current 80-100 percent to encourage risk sharing, proper risk assessment by banks, productive investment by healthy firms, and necessary restructuring by unprofitable ones.
- Some measures are already being scaled down, e.g., the expiration of the concessional lending scheme through private financial institutions, and large firms have begun to repay precautionary borrowings.

### Authorities’ views on pandemic support
- Authorities emphasized that policy support is becoming more targeted as the pandemic dissipates, in line with IMF staff advice.
- To make fiscal transfers more timely and better targeted, enhanced data is needed, including information sharing between the central government and municipalities.
- Authorities noted significant funding for promotion of science and technology and digitalization included in the FY2022 budget.
- Authorities acknowledged the risk of prolonging the lives of zombie firms due to various support programs, but emphasized the need to maintain support while the pandemic still lingers.
- Once the pandemic dissipates, support programs will be wound down, including by reducing the public credit guarantee ratio.

### Building back better: comprehensive policy mix
- Main elements needed to promote inclusive and sustainable growth and reflate the economy:
  - (i) fiscal consolidation to reduce debt sustainability risks while preserving growth;
  - (ii) further measures to enhance the sustainability of monetary accommodation;
  - (iii) strengthened financial sector policies to contain build-up of systemic risks;
  - (iv) reforms to increase labor supply, productivity, and investment, including a shift to a low-carbon economy.

### Fiscal consolidation: context and objectives
- Exceptional fiscal support and sharp output drop in 2020 and 2021 raised the debt-to-GDP ratio from 236 percent in 2019 to 263 percent in 2021.
- Debt rollover and issuance risks are low in the near term owing to a large domestic savings base, home bias, and a debt profile with no foreign currency debt.
- Demographic trends raise debt sustainability risks in the medium and long term (Annex V), calling for medium-term fiscal consolidation to put public debt on a downward path and strengthen shock response capacity.

### Fiscal framework guidance
- The transition to a sustainable fiscal position should be guided by a fiscal framework balancing short-term stabilization and medium-term fiscal sustainability. The framework should be:
  - Well-specified: consolidation strategy underpinned by well-specified fiscal measures; include contingency plans for large downside risks (pandemic outbreak, natural disaster, increase in sovereign risk premium).
  - Based on conservative projections: Cabinet Office medium-term projections often overshoot actual outturns; add a downside scenario to the baseline and high-growth scenarios; projections by an independent fiscal institution could enhance credibility if operationally independent with adequate resources.
  - Aimed at sustaining growth momentum: consolidation should consider economic conditions and include measures conducive to expansion in private demand; authorities should assess progress towards the FY2025 fiscal target weighing consolidation against the need for support in case of downside shocks.
  - Predictable: limit additional appropriations in supplementary budgets to responses to large and unexpected shocks; an independent fiscal institution could issue opinions to enhance predictability and reduce policy uncertainty.

### Fiscal adjustment: expenditure and revenue options
- Expenditure focus: contain age-related spending given non-age-related spending in Japan is low compared to peers.
  - Healthcare and long-term care spending projected to grow driven by ageing and new technology.
  - Efficiency gains: promote generic drugs, limit scope of covered services and drugs, shorten duration of in-patient care.
  - Raise out-of-pocket spending by the non-poor elderly: government decision to raise copayment ratio from 10 to 20 percent for those over 75 years old whose incomes surpass the threshold; room to raise copayment further or lower the income threshold given the elderly’s large wealth.
- Revenue mobilization options (see 2022 Japan: Selected Issues paper “Options for Revenue Mobilization”):
  - Increase the consumption tax standard rate.
  - Strengthen property taxation by removing preferential treatment of residential land.
  - Rationalize allowances and deductions in personal income taxation.
  - Increase the capital income tax rate.
  - Revenue mobilization should be accompanied by countermeasures to mitigate adverse distributional impacts.
  - Facilitate inter-governmental information flows with digitalization and the My-Number system to identify and reach households in need timely.

### Authorities’ views on fiscal targets and reforms
- Authorities committed to keeping their medium-term fiscal target of achieving primary balance in FY2025 unchanged.
- Economic and Fiscal Projections for Medium to Long Term Analysis of January 14, 2022 suggest the target could be feasible with expenditure reforms and favorable growth dynamics.
- Authorities view current policy framework as flexible enough to respond to downside risks without contingency plans; two scenarios—the Economic Growth Achieved Case and the Baseline Case—inform Council on Economic and Fiscal Policy discussions.
- Authorities underscored several expenditure reforms underway:
  - Aim to raise the volume share of generic drugs to over 80 percent in all prefectures by end-FY2023.
  - Increase out-of-pocket healthcare spending ratio for the elderly with sufficient incomes in October 2022.
  - Authorities agreed on importance of considering equity implications of tax policy, taking taxpayer wealth into account.

### Reflating the economy while preserving financial stability: monetary policy
- Given low underlying inflation, BoJ’s commitment to maintaining prolonged monetary accommodation remains appropriate.
- BoJ’s Quantitative and Qualitative Easing with Yield Curve Control framework (since September 2016) eased financial conditions but inflation target has been undershot.
- IMF staff expects that a well-coordinated policy mix (including flexible fiscal policy and inclusive growth-oriented reforms) will be required to support reflation and durably lift inflation expectations towards the 2 percent target.
- March 2021 incremental changes to BoJ’s framework:
  - More flexibility in purchases of exchange traded funds (ETFs).
  - Clarified fluctuation band around the 10-year JGB yield target.
  - New interest rate scheme to promote lending and reduce adverse side effects of negative interest rates.
- These changes increase monetary policy space and alleviate side effects on market functioning and financial system stability, but per se likely not enough to achieve the 2 percent inflation target.

### Monetary policy refinements and transmission
- Further refinements suggested:
  - Steepen JGB yield curve by shifting the zero percent JGB yield target from the 10-year to a shorter maturity to mitigate impact of prolonged accommodation on financial institutions’ profitability.
  - If well communicated and implemented with a deeper negative interest rate to avoid market perception of normalizing policy, a shorter-maturity yield target would help keep down the short- to medium-term yield curve, which matters most for economic activity.
- Room to reduce the policy interest rate if underlying inflation momentum remains weak, combined with strengthening transmission mechanism.
  - Impact of further interest rate cuts constrained by small share of bank reserves subject to negative rates (around 4 percent as of December 2021).
  - In Europe, more than 60 percent of bank reserves are subject to negative rates, which has encouraged firms to decrease cash holdings and invest more.
  - Increasing the fraction of bank reserves subject to negative rates could strengthen transmission to money markets and deposit rates, particularly for corporates, reducing corporate net savings and increasing private investment to facilitate medium-term fiscal consolidation.

### Measures to reduce the effective lower bound (ELB)
- Several factors point to a higher ELB in Japan than in other countries: more persistent low interest rates, entrenched preference for cash, prevalence of high denomination notes, low usage of digital payments, and high reliance of banks on deposits for funding.
- Initiatives to support gradual move towards a less cash-based economy include:
  - Increase relative cost of cash payments versus safe and inclusive electronic payments.
  - Reduce issuance of the highest denomination note.
  - Require commercial banks to cover the full cost of transport of cash.
  - Expand the cashless rebate program.
  - Address demand side constraints to adoption.
- These measures could help reduce the risk of cash substitution under negative policy rates.

### Communication and coordination
- Improved communication would enhance monetary policy effectiveness.
- Linking forward guidance for policy interest rates to the price stability target could reinforce yield curve control, encourage household spending today, and increase stimulative impact of rate cuts.
- Delinking the overshooting commitment from expansion in the monetary base could simplify communication.
- BoJ’s removal of the quantity guidance on JGB purchases in April 2020 was in line with past Fund advice.

### Financial stability risks and measures
- Prolonged low-interest rate environment and demographic headwinds pose risks to financial stability.
- Pandemic may intensify vulnerabilities: low profitability and declining capital adequacy ratios, especially for regional banks which account for 40 percent of the banking system.
- Policy focus on regional banks is appropriate; authorities have taken measures to incentivize profitability improvement and business diversification:
  - BoJ’s special deposit facility for regional banks that commit to mergers or streamlining overheads.
  - Government subsidies for merger and business integration.
  - Exemptions to the anti-monopoly law.
  - Amendments to the Banking Act (effective late 2021) allow banks to diversify operations into areas supporting regional revitalization and digitalization, and to fully own unlisted companies in the local economy (compared with a current cap of 50 percent).

### FSA supervisory and regulatory priorities
- Continued efforts to strengthen supervision and regulation in line with 2017 FSAP recommendations are welcome. Key areas:
  - Microprudential supervision and regulation:
    - Policy support during the pandemic will likely delay materialization of credit costs; FSA should encourage banks to enhance monitoring of credit quality.
    - Banks should enhance risk management and capacity in new business areas permitted under Banking Act amendments.
    - Once uncertainties subside, viability assessments of borrowers should be strengthened.
  - Macroprudential supervision and regulation:
    - Prolonged low interest rates could increase macro-financial risks.
    - Regular briefings by BoJ’s Financial System and Bank Examination Department at Monetary Policy Meetings (introduced March 2021) are welcome.
    - FSA should broaden scope of systemic risk assessment and enhance macroprudential toolkit to address emerging risks.
  - Facilitating business model adjustment and consolidation of regional banks:
    - Leverage Early Warning Mechanism and encourage revenue diversification, better utilization of IT/Fintech, and consolidation.
    - Adoption of IT/Fintech should be complemented by efforts to strengthen operational resilience and risk management to minimize risks from greater reliance on technology.

*International Monetary Fund — 2022 Japan staff report (chapter excerpt).*

### 34.      The authorities assessed the financial system as stable. The FSA expected no significant

### 1jpnea2022001 - 34.      The authorities assessed the financial system as stable. The FSA expected no significant

### Financial system stability and supervision
- The authorities assessed the financial system as stable.
- The FSA expected no significant impact on banks in case shocks to pandemic-hit sectors prevail for longer.
- An increasing number of regional banks is doing additional provisioning including from a forward-looking perspective.
- The FSA leverages the Early Warning System and guides regional banks to improve their business foundations.
- The BoJ assessed the special deposit facility for regional banks as successful, evidenced by improved cost efficiencies of regional banks under the scheme.
- Authorities continue dialogue with financial institutions to secure stable and well-diversified financing from overseas.

### Monetary policy and Bank of Japan (BoJ) views
- The BoJ did not see a need to adjust its current monetary framework and underscored its effectiveness and flexibility.
- The BoJ expressed concern with Fund staff’s recommendation to shorten the yield curve target and emphasized that the current framework was working well by striking an appropriate balance between controlling interest rates and managing side effects.
- The BoJ noted that when inflation approaches the 2 percent target in a stable manner, exit strategies and policies would be discussed at the BoJ’s Monetary Policy Meeting and appropriately communicated.
- The BoJ saw scope for further reducing policy interest rates if needed, under the new interest scheme to promote lending.
- The BoJ did not see the Fund’s recommendation to increase the fraction of bank reserves subject to the negative policy rate as an effective easing measure, citing potential adverse impacts on bank profits and financial intermediation.
- The BoJ warned broader imposition of negative interest rates on corporate and retail deposits could undermine public confidence and hamper private spending.
- On forward guidance, the BoJ emphasized that keeping both short- and long-term interest rate targets at extremely low levels provides a strong commitment to maintaining an accommodative monetary policy stance.
- The BoJ noted that delinking the overshooting commitment from the monetary base would not be helpful for simplifying communication, as market participants understand the BoJ’s commitment to expansion of the monetary base over the long run as a trend.
- The BoJ did not concur with Fund staff’s view that a gradual move towards a less-cash economy could further lower the effective lower bound, stating demand for cash by the public is likely to remain.

### Shifting to a Low-Carbon Economy — overarching assessment
- Japan’s renewed impetus towards reducing carbon emissions is described as an important and positive step.
- Current climate change strategy focuses on technological innovation and green finance, while contributing to regional and global decarbonization.
- Challenges: heavy reliance on fossil fuels following the shutdown of nuclear power plants after the 2011 earthquake and tsunami; the share of renewables remains relatively small.
- Reaching the goal of "zero n et emissions by 2 0 50" will require scaling up carbon pricing.

### Policy initiatives and instruments for the climate transition
- Several policy initiatives aim to facilitate the climate transition, including:
  - JPY2 trillion Green Innovation Fund.
  - The BoJ’s credit facility to support green investment (see paragraph 39).
  - Initiatives to support private climate finance.
- The BoJ’s analysis: a significant rise in the supply of green energy without much higher carbon pricing may lower energy costs and increase energy demand but may not induce sufficient switching away from high-carbon energy.
- Stronger price signals could lead to efficiency gains and better capital allocation.

### Fund staff analysis and recommended policy package
- Fund staff analysis finds that a comprehensive policy package— including green energy investment combined with a gradual rise in carbon prices—would have net positive impacts on growth, employment, and investment (see 2022 Japan: Selected Issues paper “Japan: Climate Change Policy Options”).
- Recommended directions:
  - Near-term fiscal stimulus could be better aligned with climate change policies to catalyze a green recovery; e.g., prioritize climate-resilient infrastructure and green energy investment in additional public investment, and condition support measures for the airline industry (such as a temporary cut in the Aircraft Fuel Tax) on airlines’ commitment to reduce emissions.
  - Relying on carbon pricing could amplify incentives for green private investment, accelerate the shift from high- to low-carbon energy sources, and underpin the emissions reduction target. Compensatory transfers financed partly by carbon revenues could be provided for affected households to help maintain purchasing power and consumption levels.
  - Japan could increase contributions to regional and global decarbonization; further efforts to enhance carbon pricing in Japan and climate finance in less-develop ed economies would support global climate policy.

### Green finance, disclosures, and BoJ measures
- Progress noted on developing green financial markets and managing climate-related financial risks (see 2022 Japan: Selected Issues paper “Climate Finance in Japan”).
- Sustainable and green bond issuance by Japanese entities is growing fast, supported by national standards and a subsidy scheme to defray issuance costs.
- Corporate climate disclosures are limited but improving; the revised Corporate Governance Code is expected to enhance climate disclosures of companies listed on the Prime Market.
- BoJ and FSA are studying climate change for financial stability; a pilot on climate scenario analysis is underway.
- Financial institutions and companies are encouraged to publish climate change exposures and conduct scenario analysis guided by TCFD principles.
- BoJ released a strategy on climate change in July 2021, including a new fund-provisioning measure:
  - Under the fund-provisioning measure (launched December 2021), the BoJ offers zero interest loans to financial institutions for climate-related loans and investments and exempts their reserves from its negative interest rate corresponding to twice the amount of funding provided through this measure.
  - The duration of such loans is one year, rollover permitted, effectively providing long-term funding for climate-related purposes.
- BoJ strategic priorities include integration of climate risks into monitoring and supervision, enhancement of climate-related disclosures by financial institutions, purchases of green government bonds as part of foreign currency reserve management, and promotion of climate research and international cooperation.

### Further policy efforts to strengthen climate financial risk management
- Recommended actions:
  - Improve climate data and disclosures; consider mandatory minimum standards for financial institutions, corporates, and investment funds.
  - Use green taxonomies to reduce greenwashing risks and provide market certainty.
  - Build expertise on climate finance within financial institutions; develop risk measurement and management approaches including scenario analysis.
  - Publish supervisory guidance on climate financial risks to financial institutions.

### Authorities’ views on climate policy
- Authorities reaffirmed climate commitments and green growth strategy; noted ongoing challenges in energy supply-demand structure and emphasized safeguarding energy security during transition.
- Authorities emphasized climate finance is crucial and expect private investment to play an important role in the transition.
- Authorities acknowledged the importance of carbon pricing that contributes to growth; a pilot experiment for a voluntary corporate carbon emissions trading market was recently launched.
- Authorities committed to developing green financial markets and climate financial risk management:
  - Published guidelines for climate finance and enhancing climate disclosures while supporting efforts toward global minimum standards.
  - Carrying out a pilot scenario analysis with major banks and insurers to identify challenges in scenario analysis practical use.
  - Plan to publish supervisory guidance this year for banks and insurers on climate risk management, including active engagement with clients.
  - BoJ emphasized acting in line with its mandate and considering market neutrality in the design of its climate funding measure.
- Authorities urged stronger international efforts; noted government of Japan’s commitment to provide US$10 billion over five years for adaptation investment in less-developed countries (made at COP26).
- Authorities called for further WTO discussion to clarify WTO rules as they apply to border carbon adjustments.

### Digitalization — current state and challenges
- The pandemic highlighted Japan’s uneven digitalization.
- Japan has one of the highest numbers of industrial robots but lags in digital adoption by businesses, government, and the financial sector.
- Uptake of online government services stands below 10 percent in Japan, the lowest level among OECD countries.
- Low uptake hindered government response to COVID-19, exemplified by delays in the 2020 emergency cash handout program.
- Digital transformation has lagged among private firms, including e-commerce, due in part to insufficient investment in ICT and legacy IT systems that prevent modernization.

### Government digital strategy and expected impacts
- Government initiatives include:
  - Setting up the Digital Agency to accelerate digitalization of central and local governments.
  - Promoting digitalization in the private sector.
  - Priority areas: (i) improving online administrative procedures and reducing reliance on hand-stamping paperwork; (ii) promoting the use of 'My Number' digital ID cards and linking it to bank accounts; (iii) advancing deregulation to allow online medical services and education; (iv) incentivizing digital transformation by businesses through tax credits.
- Fund staff analysis finds these measures would incentivize ICT investment and help boost labor productivity and GDP over the medium term through capital deepening and TFP growth (see 2022 Japan: Selected Issues paper “Digitalizing the Japanese Economy”).
- Policy support needed to ensure a safe and inclusive transition, including enhanced labor training especially on IT skills to address job displacement of unskilled workers.

### Financial sector digital innovation and payments
- Authorities’ efforts to expand digital innovation in financial services are expected to increase efficiency and promote inclusion.
- Cashless payments usage remains significantly lower than comparator countries and well below the government’s target of raising the share of cashless payments to 40 percent by 2025.
- FSA measures to promote digital technological innovation in the financial system include:
  - Adoption of the Financial Digitalization Strategy in 2018.
  - Setting up a Fintech Innovation Hub to enhance information sharing.
  - Introduction of a fintech proof-of-concept hub and regulatory sandbox to support new technologies.
- Recent amendment of the Payment Services Act (lifting the transfer cap on fund transfer services by nonbank institutions and reducing inter-bank fund transmission fees starting October 2021) is expected to promote digital financial services.

### Barriers and policy priorities for digital financial services
- Further lowering barriers to adoption is essential given an ageing society and entrenched cash usage.
- Priorities to build public trust in the digital economy:
  - Improve financial and digital literacy.
  - Enhance interoperability between different cashless payment platforms.
  - Strengthen data privacy, consumer protection, and cybersecurity regulations.
- BoJ evaluating central bank digital currency (CBDC) issuance:
  - BoJ has no immediate plan to issue a CBDC.
  - Preparations and research are ongoing to issue a general purpose CBDC alongside cash, indirectly through financial intermediaries, if future needs arise.

### Authorities’ views on digitalization
- Authorities acknowledged the need to close considerable gaps in Japan’s digital economy.
- They broadly agreed with staff recommendations on digitalization to enhance productivity, while flagging the need for labor market reforms and enhanced training to mitigate adverse impacts on low-skilled workers.
- The newly established Digital Agency is coordinating with other agencies to:
  - Enhance financial and digital literacy including IT skills.
  - Improve interoperability between platforms.
  - Strengthen data privacy, consumer protection, and cybersecurity.

### Building a virtuous cycle — priority reforms and expected macro effects
- Accelerating structural reforms is critical to boost productivity and wages and improve income distribution.
- Japan’s ageing and shrinking population will continue to depress productivity, investment, and real GDP growth.
- Fund staff analysis suggests implementing a mutually supportive set of structural reforms complemented by accommodative monetary policy could over the medium term:
  - Boost GDP by as much as 11 percent.
  - Raise prices by 3 percent compared to the baseline (Annex VIII).
- Priority reform areas:
  - Increase labor supply:
    - Further expand access to affordable and high-quality childcare and enhance flexible work arrangements as part of the Work Style Reform (WSR) program to sustain increased labor force participation by women and the elderly (Annex IX).
    - Reduce gender gaps by incentivizing gender-balanced management, removing discriminatory workplace regulations, and narrowing gender wage gaps.
    - Enhance policies promoting employment of foreign skilled professionals and workers in sectors with severe labor shortages.
  - Boost labor productivity and wages:
    - The recently expanded corporate tax credit for wage increases will mainly benefit regular workers and large firms; it could be complemented by further reforms.
    - Follow-up on WSR implementation to eliminate productivity and wage gaps between regular and non-regular workers.
    - Complement skill training programs with shifts to flexible employment and wage systems based on ability rather than seniority.
    - Reforms to reduce labor market duality to enhance career opportunities for non-regular workers.
  - Improve corporate governance:
    - The Corporate Governance Code revised in June 2021 aims to enhance board independence, promote diversity (including hiring targets for women and foreigners), and focus on sustainability and ESG.
    - Further steps could include more ambitious requirements for outside directors and explicit limits on cross-shareholdings to enable firms to deploy cash reserves and boost investment and productivity.
  - Foster investment:
    - Support orderly exit of firms and incentivize non-family succession.
    - Facilitate exit of non-viable SMEs and entry of firms with stronger potential.
    - Incentivize alternative financing for SMEs and startups (e.g., asset-based lending and venture capital).
    - Improve the business environment via deregulation (professional services, land use, barriers to entry, protection of incumbents) and enhanced R&D investment.
    - Address impediments to inward FDI through simplified procedures and speedy processes to allow the use of foreign labor.
    - Consider shifting corporate income taxation to a cash-flow based tax, with a higher statutory rate, to help increase investment in a revenue neutral way.

*Source: 1jpnea2022001 - 34.      The authorities assessed the financial system as stable. The FSA expected no significant*

### 53.      Japan has taken a welcome lead globally and regionally to promote more open, stable,

### Japan has taken a welcome lead globally and regionally to promote more open, stable, and transparent trade policies.

### Trade policy, investment screening, and WTO engagement
- Japan's trade and FDI regimes are broadly open, although agricultural support policies remain relatively restrictive.
- Revisions to the Foreign Exchange and Foreign Trade Act, which took effect in 2020, subject foreign investment in national security-related industries to greater scrutiny.
- Japan continued to strengthen trade relations through:
  - Entry into force of the Regional Comprehensive Economic Partnership Agreement.
  - Entry into force of the Japan-UK trade agreement.
  - Leading discussions on potential expansion of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership to new members.
- Japan is committed to WTO reform and has been actively involved in negotiations for plurilateral WTO agreements (“Joint Statement Initiatives”) on e-commerce and investment facilitation.
- Japan is an important participant in the newly concluded plurilateral WTO agreement on Services Domestic Regulation, which is expected to reduce service trade costs and benefit Japan and the global economy.
- Recommendation: Japan should continue efforts to work actively with international partners to strengthen the rules-based multilateral trading system, including ensuring effective WTO dispute settlement.

### Supply-chain resilience and subsidy programs
- Two programs introduced in 2020 aim to strengthen the domestic production base and diversify supply chains in Asia, particularly among ASEAN countries:
  - “Program for Promoting Investment in Japan to Strengthen Supply Chains” (targets: semiconductors, electric vehicles, wind power turbines, aircraft, storage batters, and medical supplies).
  - “Program for Supply Chain Resilience in the Indo-Pacific Region”.
- Assessment: These subsidy programs should bolster the efficiency of global value chains.
- Caution: It is important to guard against the potential for such subsidies to inadvertently weaken supply resilience by fragmenting existing investment and trading relationships.

### Anti–money laundering / combating the financing of terrorism (AML/CFT)
- Assessment: Japan is moderately effective in investigating and prosecuting money laundering (ML) and cooperates well with foreign counterparts, but should further prevent foreign public officials concealing proceeds of corruption in its economy.
- Financial Action Task Force (FATF) findings: Japanese authorities have well developed financial investigation and prosecution capacity and provide constructive international cooperation, but face challenges in investigating complex, larger-scale ML cases of cross-border and domestic drug trafficking and could improve understanding of cross-border risks.
- Recommendations and recent measures:
  - Prioritize pursuit of ML associated with foreign predicate offenses including corruption where relevant.
  - Requirements on financial institutions and most non-financial obligated entities to identify and verify beneficial ownership (BO) and monitor business relationships, including with respect to foreign politically exposed persons, have recently been strengthened.
  - Ensure timely and effective implementation of these measures, including by developing guidance for non-financial obligated entities.
  - Complement these actions by enabling centralized public notaries’ databases on accurate BO information of legal persons and arrangements that are accessible by law enforcement agencies in a timely manner.
- Reference: FATF Mutual Evaluation Report for Japan, 2021 (as cited in source).

### Authorities’ stated views
- Authorities broadly agreed with staff-recommended reforms to increase labor supply and productivity and improve corporate governance.
- They noted initiatives to increase female and elderly worker participation continue to bear fruit and that early experience with the WSR has shown a reduction in aggregate and overtime working hours.
- The authorities indicated the Equal Pay for Equal Work pillar of the WSR should enable fair evaluation and improve pay equality among workers.
- Authorities emphasized continued priority on reforms while adding emphasis on wage increases and investment in people.
- A Council for the New Form of Capitalism will present details of the “New Form of Capitalism” growth and distribution strategy in Spring 2022.
- Authorities highlighted Japan’s global leadership role in advancing regional and multilateral trade agreements and stressed the need for an effective WTO dispute settlement mechanism and WTO modernization.

### Staff appraisal — macroeconomic outlook and policy recommendations
- Economic recovery and external position:
  - The Japanese economy is recovering from the pandemic.
  - Authorities’ broad-based policy support to counter the adverse impacts of the pandemic has been appropriate.
  - Financial stability has been maintained and scarring is expected to be limited.
  - On a preliminary basis and adjusting for transitory pandemic-related factors, the external position in 2021 is assessed as broadly in line with medium-term fundamentals and desirable policies.
- Near-term outlook and risks:
  - Recovery is set to continue in the near term, but unusual uncertainty around the pandemic and the conflict in Ukraine poses downside risks.
  - After the Omicron wave passes, growth is expected to rebound strongly amid an unwinding of pent-up demand, easing supply constraints, and continued policy support.
  - Risks include new COVID-19 waves, the conflict in Ukraine, and potential macro-financial risks from a sharp tightening of global financial conditions.
  - Inflation momentum is expected to pick up but on current policies inflation would stay below the BoJ’s 2 percent target.
  - An ageing and declining population will continue to weigh on Japan’s growth potential and fiscal positions in the medium to longer term.

- Fiscal policy:
  - Near-term fiscal policy should be nimble and flexible, including through contingency planning in case of escalation of the Russia-Ukraine conflict, followed by a medium-term adjustment.
  - Near-term policy should remain supportive but increasingly shift toward more targeted measures; scale and composition of support should be adjusted in response to epidemiological, economic, and geopolitical developments.
  - A well-specified medium-term fiscal framework is needed to put public debt on a downward path while preserving growth and strengthening the ability to respond to future shocks.

- Monetary policy:
  - The BoJ’s commitment to maintaining prolonged monetary accommodation is appropriate.
  - Further refinements could be considered to safeguard financial stability, including a steepening of the yield curve by shifting the yield target from 10 years to a shorter maturity.
  - Communication could be further strengthened to help enhance monetary policy effectiveness.
  - Comprehensive and mutually reinforcing fiscal, monetary, and structural policies are essential to provide the necessary support to lift inflation durably to its target.

- Financial supervision and sectoral reforms:
  - Financial supervision should remain vigilant to contain vulnerabilities.
  - As the pandemic recedes, pandemic-related financial support should be scaled down by shifting towards viable but liquidity-constrained firms and reducing loan guarantee and concessional loan programs.
  - Financial authorities should further strengthen financial sector supervision and regulation, broaden the scope of the systemic risk assessment, and enhance the macroprudential toolkit to address risks as they emerge.
  - Authorities should continue to engage with regional banks to facilitate upgrading business models, better utilization of IT/Fintech, streamlining costs, and consolidation amid structural headwinds.

- Climate and green finance:
  - Japan’s carbon neutrality commitment is welcome, and further efforts to execute it could be considered.
  - The authorities’ green growth strategy could be complemented by carbon pricing along with compensatory transfers to vulnerable groups to engineer the green transition in a growth-friendly way.
  - Improved climate disclosures, green taxonomies or equivalent approaches, and supervisory guidance on climate risk management and climate risk scenarios would help manage climate financial risks and green financial markets.

- Digital transformation:
  - Progress toward digital transformation would help boost productivity.
  - The centralized Digital Agency has the potential to accelerate digitalization in the public sector.
  - Incentives to encourage digitalization in the private sector could catalyze digital investment.
  - To ensure an inclusive transition, supportive measures would be needed to avoid job displacement of unskilled workers.
  - Further improving financial and digital literacy and strengthening data privacy, customer protection, and cybersecurity are important to accelerate digital adoption.

- Structural reform priorities:
  - Accelerating reforms will be critical to improve growth potential and income distribution.
  - Priority reform areas: comprehensive reforms to increase labor supply, productivity, and wages (including for female and older workers); broadening and deepening of corporate governance and regulatory reforms to improve business dynamism and spur investment.
  - Japan should continue multilateral and regional efforts to promote more open, stable, and transparent trade policies, including through advancing WTO reform.

*Source: IMF staff report excerpt.*

### 66.      It is recommended that the next Article IV consultation take place on the standard 12-

### 1jpnea2022001 - 66.

### Recent Economic Developments
- After a strong rebound in the second half of 2020, growth slowed in 2021 due to resurgence of COVID-19 infections.
- As a result, real consumption and wages are still below pre-pandemic level.
- Private consumption is recovering, led by services, while public spending has risen during the pandemic.
- Exports have slowed recently due to supply constraints.
- Savings rose sharply during the pandemic.
- Contributions to Real GDP Growth (QoQ growth in percent, SA) shown across components: Private consumption, Private investment, Private inventories, Government spending, Net exports, Real GDP (chart series 2018Q1–2021Q4).
- Real private consumption and Real wage per regular employee indexed (2018Q1=100) show divergence (series through 2021Q4).
- Government consumption expenditure and Gross Public Domestic Fixed Investment indexed (2018Q1=100) charted (series through 2021Q4).
- Real Export by Destination (2018Q1=100; Seasonally Adjusted) series for World, USA, EU, Asia (through 2021Q4).
- Domestic Final Household Consumption Expenditure by Type (y-o-y growth rate) shows Services, Non-durable Goods, Semi-durable Goods, Durable Goods (series through 2021Q4).
- Increase in Precautionary Savings (in percent, y-o-y) components: Cash, Corporate deposits, Household deposits, Money Supply (M1) (series Dec-15 to Dec-21).

### Inflation Developments
- Headline inflation has risen in 2021.
- Rise driven by temporary factors such as oil and food prices.
- Survey-based inflation outlook has recovered (Tankan Survey: 1 Year ahead, 3 Year ahead, 5 Year ahead; YoY in percent).
- Market-based inflation expectations have recovered (Inflation-Swaps 5Y, Inflation-Swaps 10Y, Break-even rate 10Y JGBs; series Nov-13 to Jan-22).
- Recovery of inflation driven by import prices while price of services remains weak.
- Headline and core CPI (ex. fresh food and energy; core) inflation (In percent YoY) charted Apr-18 to Dec-21.
- Headline CPI Inflation Contribution by category (In percent YoY) charted Apr-18 to Dec-21.
- Producer Price Index (In percent YoY): Corporate goods price index and Services Producer Price Index series Dec-17 to Dec-21.
- Export and Import Price Indices (In percent YoY) series Jan-18 to Jan-22.

### Monetary and Credit Conditions
- Money supply increased significantly at the onset of the pandemic, but growth has slowed down recently (Monetary Base (M0), Money stock (M1), Money stock (M3); Y-o-Y percent change Dec-13 to Dec-21).
- Real lending rates and real 10-year Japanese government bond yields have been declining (Real Lending Rate (net of 10 year inflation swaps); Real 10-year JGB Rate).
- Bank lending rates declined for new short-term loans; bank lending standards eased significantly in 2020Q2 and have been less accommodative more recently (Bank Lending Rates; Bank Lending Standards for Households, Large Firms, SMEs).
- Bank lending rose sharply for both large and small firms but has been increasing at a much slower pace recently (Growth in Bank Lending; Total, Large corporations, SMEs, Individuals).
- Corporate bond spreads increased after the COVID shock but are now back to pre-COVID levels (Corporate-Government Bonds Spreads (5Y) for AA-rated, A-rated, BBB-rated).
- BoJ balance sheet expanded amid its policy response to COVID-19; more recently expansion scaled down back in line with pre-COVID pace (BoJ Accounts: Assets and Liabilities, in billions of Yen, Jan-10 to Jan-22).
- BoJ JGB holdings by maturity charted (2015–2021) and BoJ Outstanding ETFs and REITs presented (in billion of Yen; share of market cap RHS).
- BoJ’s purchases of Japanese government bonds has slowed; purchases of ETFs and J-REITs have declined after rising sharply in response to the pandemic.
- BoJ’s USD funds-supplying operation together with other major central banks helped ease USD funding stress; outstanding amounts of the BoJ-Fed USD swap line continued to decline (BoJ Lending - USD Funds-Supplying Operation; Fed Dollar Swap Line: Amounts Outstanding in Billion of USD).

### Financial Markets Developments
- The yen has depreciated against most currencies since May 2020 (Selected Exchange Rates, Jan 3, 2017=100; latest data as of February 4, 2022).
- A net short-yen position emerged in early 2021 (Chicago Mercantile Exchange Yen Position; data as of February 4, 2022).
- Market uncertainty picked up in early 2022 (VIX Index and Exchange Rate, with risk-off episodes shaded).
- U.S.-Japan interest rate differentials widened as U.S. inflation expectations rose (Interest Differential: US-JPN (10 year), US-JPN (2 year), Germany-JPN (10 year; RHS), Germany-JPN (2 year; RHS)).
- Equity indices have recovered to above pre-pandemic levels (NIKKEI 225, TOPIX, TOPIX-REIT, TOPIX-BANKS, S&P 500; Jan 2017=100).
- U.S. dollar funding costs spiked at the onset of the pandemic, stabilized at a low level subsequently, and have been increasing lately (USD LIBOR (3M), BOJ USD funds-supplying operations rate, FX swaps-Implied USD rate (3M), US 10-year Treasury Yield; series Feb-20 to Feb-22).

### Labor Market and Wage Developments
- Labor force participation rebounded after a drop at the onset of the pandemic (Male and Female participation rates, series 2011Q4–2021Q4).
- The unemployment rate only rose modestly thanks to government support (Unemployment Rate in percent of labor force, SA; Male and Female series).
- Job openings to applicants fell as demand for labor remained weak particularly in non-manufacturing sectors (Vacancy Rate and Job Openings to Applicants ratio; series through 2021Q4).
- Tankan Enterprise Survey: Employment Conditions shows manufacturing and non-manufacturing diffusion indices (positive index represents demand for hiring additional labor).
- Part-time employment has gradually picked up (Employment Growth Rate: Full-time, Part-time, Total; average annual growth series).
- Wage growth remained weak (Nominal Wage Growth per Full-Time Employee: Wage growth per hour, Growth in hours worked per employee, Wage growth per employee; annual rates 2016–2021).

### Fiscal Developments
- The fiscal balance is projected to improve as the pandemic-related measures wind down.
- The current favorable funding environment is underpinned by the BoJ’s JGB holdings and a stable domestic investor-base.
- Over the long-term, health care and long-term care costs are set to increase as the population ages, posing a growing threat to Japan’s fiscal sustainability.
- Relative to peers, Japan’s share of non-social security spending is low, while there is room for increasing tax revenues.
- General Government Fiscal Balance (In percent of GDP) series and projection: Total revenue, Expenditure, Structural primary improvement (RHS) charted (2007–2027).
- Public Debt Financing composition (In percent of GDP; end of period) charted 2005–2020.
- Japan: Gross Public Debt and Primary Balance (In percent of GDP) series 2014–2030 (Gross Debt and Primary Balance plotted).
- OECD: Spending Excluding Social Security and Interest (In percent of GDP, 2020) shows Japan low relative to peers.
- General Government Tax and Social Security Revenue, 2019 (In percent of GDP) components: Social Security Contributions, Consumption Tax, Personal Income Tax, Corporate Income Tax, Other Taxes; OECD Average as of 2019 included.

### Climate Change
- Japan is one of the countries with the highest climate change risks among G20 peers (Global Climate Risk Index average 2000-2019).
- Japan appears to have strong adaptive capacity to handle climate-related risks to physical exposures (Climate Change Coping Capacity scale 0-10).
- Japan is one of the largest carbon emitters in the world, exposing it to transition risks (Annual CO2 Emissions by Country, Percent of total, 2020).
- Temperature Anomalies (1880-2019; HP filter, in degrees Celsius) indicate trends: World 0.21°C/decade; Japan 0.11°C/decade (note: series departures from 20th century temperature average).
- Strong climate change mitigation policy is needed to cope with global warming.
- Green finance will help price climate related risks and facilitate large investment needs to mitigate and adapt to climate change.
- Sustainable Debt Issuances by Japanese Entities (Billions of US dollars; As of Apr-21) show growth in Green Bond, Green Loan, Social Bond, Sustainability Bond, Sustainability-linked Bond, Sustainability-linked Loan.
- ESG Equity Fund Flows: All Developed Markets (LHS) and Japan (RHS) series (Millions of US Dollars).

### Selected Economic Indicators, 2018–23 (key figures from Table 1)
- Nominal GDP: US$ 4,937 Billion (2021)
- GDP per capita: US$ 39,340 (2021)
- Population: 126 Million (2021)
- Quota: SDR 30.8 billion (2021)
- Real GDP growth: 2019 -0.2; 2020 -4.5; 2021 1.6; 2022 2.4; 2023 2.3
- Headline CPI: 2019 0.5; 2020 0.0; 2021 -0.3; 2022 1.0; 2023 0.8
- General government revenue (percent of GDP): 2021 35.5; 2022 35.5; 2023 35.0
- General government expenditure (percent of GDP): 2021 43.2; 2022 42.8; 2023 38.5
- Overall balance (percent of GDP): 2021 -9.0; 2022 -7.6; 2023 -7.8
- Primary balance (percent of GDP): 2021 -8.3; 2022 -7.0; 2023 -7.4
- Public debt, gross (percent of GDP): 2021 259.0; 2022 263.1; 2023 262.5
- Base money (y-o-y): 2019 9.7; 2020 5.0; 2021 2.8
- Broad money (y-o-y): 2019 3.5; 2020 2.3; 2021 2.1
- Current account balance (US$ billion): 2019 203.5; 2020 177.8; 2021 176.0
- Current account balance (percent of GDP): 2019 4.1; 2020 3.5; 2021 3.4
- Exports of goods and services (US$ billion): 2019 689.1; 2020 735.9; 2021 695.0
- Imports of goods and services (US$ billion): 2019 645.0; 2020 724.9; 2021 693.6
- Energy imports (US$ billion): 2019 117.8; 2020 148.5; 2021 131.9
- Change in reserves (US$ billion): 2019 23.6; 2020 24.0; 2021 25.5
- Total reserves minus gold (in billions of US$): 2019 1232.4; 2020 1239.4; 2021 1286.3
- Yen/dollar rate: 2019 112.2; 2020 110.4; 2021 109.0

### Monetary Authority Accounts and Monetary Survey (selected from Table 2)
- Monetary Authority: Net foreign assets (2019 -24.2; 2020 -19.5; 2021 -16.3; 2022 -20.9; 2023 -20.0) (In trillions of JPY)
- Monetary base (In trillions of JPY): 2019 518.2; 2020 617.6; 2021 670.4; 2022 690.0; 2023 715.1
- Monetary Survey (Broad money, In trillions of JPY): 2019 1,409.9; 2020 1,513.1; 2021 1,558.5; 2022 1,611.4; 2023 1,666.3
- Credit to the private sector from depository corporations (In trillions of JPY): 2019 108.8; 2020 120.1; 2021 120.8; 2022 118.7; 2023 118.1
- Base money (y-o-y growth in percent): 2019 2.8; 2020 19.2; 2021 8.6; 2022 2.9; 2023 3.6
- Broad money (y-o-y growth in percent): 2019 2.1; 2020 7.3; 2021 3.0; 2022 3.4; 2023 3.4
- Loan-to-deposit ratio (percent) 1/: 2019 54.0; 2020 53.0; 2021 51.6; 2022 50.6; 2023 50.2

### External Sector Summary (selected from Table 3)
- Current account balance (US$ billion): 2019 176.0; 2020 148.8; 2021 141.7; 2022 117.2; 2023 142.2; 2024 166.2; 2025 183.5; 2026 192.8; 2027 202.0
- Current account balance (percent of GDP): 2019 3.4; 2020 3.0; 2021 2.9; 2022 2.4; 2023 2.7; 2024 3.0; 2025 3.2; 2026 3.2; 2027 3.2
- Exports of goods (US$ billion): 2019 695.0; 2020 631.5; 2021 748.5; 2022 806.8; 2023 856.2; 2024 894.4; 2025 927.4; 2026 951.7; 2027 979.3
- Imports of goods (US$ billion): 2019 693.6; 2020 602.8; 2021 732.1; 2022 836.6; 2023 878.1; 2024 900.0; 2025 923.3; 2026 946.7; 2027 972.7
- Imports of goods, Oil (US$ billion): 2019 92.0; 2020 59.1; 2021 88.9; 2022 136.4; 2023 117.3; 2024 105.8; 2025 97.9; 2026 92.4; 2027 88.9
- Financial account (US$ billion): 2019 227.9; 2020 128.6; 2021 98.4; 2022 114.2; 2023 138.8; 2024 162.5; 2025 180.1; 2026 189.2; 2027 198.1
- Nominal GDP (US$ billion, memorandum): 2019 5,122.4; 2020 5,040.1; 2021 4,938.1; 2022 4,912.1; 2023 5,291.4; 2024 5,527.7; 2025 5,820.0; 2026 6,063.3; 2027 6,259.8
- Global assumptions: Oil prices (US$/barrel) series 2019–2027: 2019 61.44; 2020 41.36; 2021 69.11; 2022 106.89; 2023 92.68; 2024 84.27; 2025 78.57; 2026 74.77; 2027 72.5

### General Government Operations (selected from Table 4)
- Total revenue (percent of GDP): 2019 34.2; 2020 35.6; 2021 35.5; 2022 35.0; 2023 35.0; 2024 35.0; 2025 34.9; 2026 34.9; 2027 34.9
- Total expenditure (percent of GDP): 2019 37.2; 2020 44.5; 2021 43.2; 2022 42.8; 2023 38.5; 2024 37.5; 2025 37.5; 2026 37.6; 2027 37.7
- Net lending/borrowing (overall balance, percent of GDP): 2019 -3.0; 2020 -9.0; 2021 -7.6; 2022 -7.8; 2023 -3.5; 2024 -2.5; 2025 -2.5; 2026 -2.6; 2027 -2.8
- Primary balance (percent of GDP): 2019 -2.4; 2020 -8.3; 2021 -7.0; 2022 -7.4; 2023 -3.3; 2024 -2.3; 2025 -2.3; 2026 -2.4; 2027 -2.4
- Gross debt (percent of GDP): 2019 236.1; 2020 259.0; 2021 263.1; 2022 262.5; 2023 258.3; 2024 258.7; 2025 259.4; 2026 260.5; 2027 261.8
- Memo: Nominal GDP (trillion yen) 2019 558.5; 2020 538.2; 2021 542.0; 2022 557.0; 2023 572.4; 2024 579.3; 2025 585.8; 2026 591.0; 2027 596.0

### Medium-Term Projections (selected from Table 5)
- Real GDP (percent change): 2019 -0.2; 2020 -4.5; 2021 1.6; 2022 2.4; 2023 2.3; 2024 0.8; 2025 0.7; 2026 0.5; 2027 0.4
- Private final consumption (percent change): 2019 -0.5; 2020 -5.2; 2021 1.3; 2022 2.3; 2023 2.7; 2024 0.7; 2025 0.4; 2026 0.3; 2027 0.2
- Unemployment rate (percent): 2019 2.4; 2020 2.8; 2021 2.8; 2022 2.6; 2023 2.4; 2024 2.4; 2025 2.4; 2026 2.4; 2027 2.4
- Headline CPI inflation (average percent): 2019 0.5; 2020 0.0; 2021 -0.3; 2022 1.0; 2023 0.8; 2024 0.9; 2025 1.0; 2026 1.0; 2027 1.0
- Output gap (percent of potential output): 2019 -1.4; 2020 -2.7; 2021 -2.6; 2022 -1.7; 2023 -0.4; 2024 -0.2; 2025 0.0; 2026 0.0; 2027 0.0
- Overall fiscal balance (percent of GDP): 2019 -3.0; 2020 -9.0; 2021 -7.6; 2022 -7.8; 2023 -3.5; 2024 -2.5; 2025 -2.5; 2026 -2.6; 2027 -2.8
- General government debt, gross (percent of GDP): see General Government Operations above.
- Current account balance (percent of GDP): 2019 3.4; 2020 3.0; 2021 2.9; 2022 2.4; 2023 2.7; 2024 3.0; 2025 3.2; 2026 3.2; 2027 3.2

### Financial Soundness Indicators (selected from Table 6)
- Regulatory capital to risk-weighted assets (percent): 2015 15.5; 2016 15.9; 2017 16.0; 2018 17.1; 2019 17.2; 2020 16.4
- Regulatory tier 1 capital to risk-weighted assets (percent): 2015 12.5; 2016 13.3; 2017 13.5; 2018 14.9; 2019 15.1; 2020 14.4
- NPL net of provisions/capital (percent): 2015 12.8; 2016 11.5; 2017 9.0; 2018 7.6; 2019 7.6; 2020 8.2
- Non-performing loans (NPL) to total loans ratio (percent): 2015 1.6; 2016 1.5; 2017 1.3; 2018 1.1; 2019 1.1; 2020 1.1
- Return on assets (percent): 2015 0.3; 2016 0.3; 2017 0.2; 2018 0.2; 2019 0.1; 2020 -0.1
- Return on equity (percent): 2015 6.3; 2016 6.9; 2017 5.1; 2018 5.4; 2019 2.3; 2020 -1.3
- Interest margin (percent): 2015 1.2; 2016 1.1; 2017 1.1; 2018 1.1; 2019 1.1; 2020 1.0
- Liquid assets to total assets (percent): 2016 26.9; 2017 27.2; 2018 28.7; 2019 29.6; 2020 29.4; 2021 29.5
- Non-interbank loans-to-customer-deposits (percent): 2015 75.7; 2016 74.9; 2017 73.3; 2018 71.7; 2019 71.7; 2020 71.8

*International Monetary Fund (extracted figures and charts from the cited content unit).*

### Annex I. Health Responses to the Pandemic

### Annex I. Health Responses to the Pandemic

### Overview and key outcomes
- Japan minimized COVID-related mortality while avoiding strict lockdowns; its COVID-related mortality rate is one of the lowest among advanced economies.
- More than three quarters of the population have been fully vaccinated; by December 1, 78 percent of the population was fully vaccinated.
- Booster shots were administered starting in December 2021; by March 3, 23 percent of the population were boosted.
- A new omicron wave in early 2022 pushed daily case counts above 100,000 and produced record infections in Q1 2022; hospitalizations and deaths related to COVID-19 infections surpassed previous peaks.
- Mobility fell significantly in January and February 2022 as people reduced outings voluntarily; mobility has started to recover after infections and hospitalizations peaked at end-February.
- Continued fast rollout of booster shots (above 1 million doses per day in early March) could help strengthen immunity against the omicron variant and avoid overwhelming the health sector.

### Vaccination rollout and booster program
- Vaccine rollout accelerated after late May 2021 as supply constraints eased, using mass vaccination sites and corporate vaccination drives.
- By December 1, 78 percent of the population was fully vaccinated.
- Booster rollout began in December 2021; initial government policy required an eight-month interval for the booster shot, subsequently reduced to six months for those above 64 and seven months for others.
- Booster rollout accelerated to above 1 million doses per day in early March 2022; 23 percent of the population were boosted by March 3, 2022.

### Containment strategy and States of Emergency (SoEs)
- Japan relied on timely declarations of States of Emergency (SoEs), habitual mask wearing, relatively high hospital bed density, voluntary compliance, and targeted cluster identification through contact-tracing.
- Containment measures under SoEs were much less restrictive than in other countries due to legal constraints on enforcing strict lockdowns.
- Resurgence of infections in 2021 led to three widespread SoEs, which delayed economic recovery in 2021:
  - A two-month SoE in January 2021 after the health system became increasingly stressed.
  - A second SoE that temporarily reduced infections; its effect proved short-lived.
  - A third SoE in April 2021 with more stringent measures; a law on anti-virus measures was toughened allowing prefectural governors to issue binding orders on short business hours and temporary business closures.
  - On July 12, 2021, a fourth SoE in the Tokyo region covered the duration of the Olympic Games; the SoE was later expanded to cover 21 prefectures and extended to last until September 30, 2021.
- The SoEs discouraged mobility and dampened consumption of services, although the effect weakened over time.

### Omicron wave and quasi-SoE measures (Q1 2022)
- The omicron variant led to record infections in the first quarter of 2022 with daily cases above 100,000.
- The government applied quasi-SoE measures in 35 prefectures; measures lasted until March 21 for 18 prefectures.
- Quasi-SoE measures are less stringent than SoEs, but mobility fell significantly in January and February 2022.
- The number of hospitalizations and deaths surpassed previous peaks amid a slow booster rollout early in the wave; booster rollout subsequently accelerated.

### Health sector capacity and behavioral factors
- Factors contributing to low mortality include timely SoEs, habitual mask wearing, and relatively high hospital bed density.
- Japan’s strategy relied heavily on voluntary compliance and targeted contact-tracing; with relatively few cases in 2020 and high self-restraint, this strategy contained the virus relatively well in 2020.

---

### Fiscal response and macroeconomic impact (Annex III summary)

### Size and composition of fiscal response
- The total size of above-the-line (ABL) measures is estimated at 103.0 trillion JPY (18.5 percent of 2022 GDP).
- Breakdown by package (In trillion JPY):
  - April 2020 package: ABL measures after adjustment (D) = 32.0
  - FY2020 second supplementary budget (May 2020): D = 13.6
  - December 2020 package: D = 18.8
  - November 2021 package: D = 26.3
  - COVID-19 Reserve Fund: D = 12.3
  - Total amount of ABL measures (Sum of (D)) = 103.0 (18.5 percent of 2022 GDP)
- About 60 percent of the fiscal amount has been or will be spent on assistance to firms and households (job retention programs, cash transfers, subsidies).
- About 15 percent of the fiscal amount is on health-related measures (total health-related measures across years = 15.5 trillion JPY).

### Year-by-year allocation and totals (selected figures)
- Total ABL measures by package (In trillion JPY): 32.0; 13.6; 18.8; 26.3; 12.3 — Total 103.0.
- Total (in percent of GDP) by package: 5.7 percent; 2.4 percent; 3.4 percent; 4.7 percent; 2.2 percent — Total 18.5 percent of GDP.
- Composition summary (In trillion JPY) and cumulative totals:
  - Health-related measures: total 15.5
  - Support to households: total 28.9
  - Job retention programs: total 5.2
  - Support to firms: total 26.7
  - Public investments: total 13.0
  - Others/Unallocated: total 13.7
  - Total: 103.0

### Estimated macroeconomic impact
- The weighted average of estimated multipliers for the ABL measures is about 0.3.
- The cumulative impact on output relative to a counterfactual with no fiscal measures is estimated at about 31 trillion JPY (about 5 ½ percent of 2022 GDP).
- Automatic stabilizers worked mainly through the job retention subsidies: the disbursed amount of the Employment Adjustment Subsidy increased by about ½ percent of GDP both in 2020 and 2021, relative to 2019.

### Multipliers and rationale (by measure)
- Overall weighted-average multiplier: 0.3
- Health-related measures: multiplier = 0.3
  - Rationale: assumed about a quarter of budgeted amount spent on medical services (government consumption) with multiplier of 1; remainder comprises low-multiplier items (cash transfers to medical practitioners, subsidies for hospitals reserving beds, imports of vaccines/drugs/testing kits) with multiplier of 0.1.
- Support to households: multiplier = 0.2
  - Rationale: Marginal propensity to consume (MPC) assumptions: 0.1 for untargeted transfers, 0.25 for targeted transfers; untargeted transfers assumed to be about 60 percent of total leading to weighted-average MPC of 0.16 and multiplier of 0.2 (0.16/(1-0.16)=0.19). Consideration of leakage to imports and pent-up consumption noted.
- Job retention scheme: multiplier = 0.2
  - Rationale: Cabinet Office (2021) estimate that unemployment rate between April and December 2020 could have been higher by 1.5~3 ppt without the Employment Adjustment Subsidy (EAS). Estimated that about half of beneficiaries would have lost jobs without EAS; assigned MPC of 0.25 to those individuals and MPC of 0.1 to the rest, yielding multiplier of 0.2.
- Support to firms: multiplier = 0.15
  - Rationale: Estimated that about half of budgeted amount is lifeline support mainly for SMEs with multiplier of 0.05; other half comprises subsidies to firms (e.g., SMEs' business transformation) with multiplier of 0.24; combined weighted multiplier = 0.15.

### Policy orientation and implications (from Annex II context)
- The policy response appropriately prioritized support to affected households, workers, and firms while maintaining the smooth functioning of financial markets.
- As recovery becomes entrenched, extraordinary policy support should gradually be withdrawn and reoriented toward post-pandemic priorities:
  - Shift policy focus to structural reforms and fiscal sustainability.
  - Fiscal consolidation should proceed in a gradual manner and be accompanied by a credible medium-term fiscal framework, accommodative monetary policy, and structural reforms to support domestic demand.
  - Priority reforms: increase labor supply, boost productivity and wages, and deregulation.

*Source: Annex I, Annex II, and Annex III of the provided IMF Japan chapter (text and tables as supplied).*

### 1. Impact of the former could be measured by the extent to which fiscal support prevented exits of firms. Assuming that 

### 1jpnea2022001 - 1. Impact of the former could be measured by the extent to which fiscal support prevented exits of firms. Assuming that

### Fiscal support, firm exits, and multipliers
- Assuming that firm exits would have been higher by 20 percent in 2020 without the support (Miyakawa et al. (2020)), and that exits are concentrated in the accommodation and dining industry, the pandemic could have forced about 2 percent of total firms in the industry to exit.
- Translating the firm-exit scenario into output loss yields 0.2 trillion JPY (using the share of the industry in GDP).
- This implies an estimated multiplier of up to 0.05 for the fiscal support that prevented firm exits.
- Multiplier estimates for other measures:
  - Corporate income tax rate increase (Cabinet Office's Economic and Fiscal Model (2018)): first-year multiplier is 0.24.
  - Public investment: an estimated multiplier is 1.0, based on the first-year multiplier of one-off change in public fixed-capital formation (1.15) from the Cabinet Office's Economic and Fiscal Model (2010) and an assumption that about 10 percent of the budget is spent on land-acquisition.
  - Others: an estimated multiplier is 0.2. This majority is accounted for by the Local Revitalization Grant, assumed to be spent as:
    - one-half on support to firms including compensation to restaurants who scale down operations to prevent infections (assumed multiplier of 0.05),
    - one-quarter on health-related measures (assumed multiplier of 0.3),
    - one-quarter on other miscellaneous measures (assumed multiplier of 0.3).

### Risk Assessment Matrix — main risks, expected impacts, and recommended policy actions
- Extended global supply chain disruptions (Likelihood: High; Time Horizon: ST, MT; Expected Impact: High)
  - Main impacts: Shortages of intermediate and final consumer goods, growth slowdowns, and price surges.
  - Recommended actions: contain the spread of the virus through vaccination and testing; and enhance supply chain resilience.
- Outbreaks of lethal and highly contagious Covid-19 variants (Likelihood: High; Time Horizon: ST; Expected Impact: High)
  - Main impacts: global resurgence requiring costly containment and persistent changes.
  - Recommended actions: Provide relief to affected workers and firms, and support to the health systems.
- Geopolitical tensions and de-globalization (Likelihood: High; Time Horizon: ST, MT; Expected Impact: Medium)
  - Main impacts: Economic/political disruption with spillovers to Japan.
  - Recommended actions: Continue to pursue open market policies.
- De-anchoring of inflation expectations in the United States lead to rising core yields and risk premia (Likelihood: Medium; Time Horizon: MT; Expected Impact: Medium)
  - Main impacts: Interest rate differential could weaken the JPY and raise inflation to the target; abrupt deterioration could trigger safe-haven JPY appreciation, deflationary pressures, and macro-financial risks.
  - Recommended actions: Maintain monetary accommodation until inflation is sustainably at or above the target.
- Rising and volatile energy and food prices (Likelihood: High; Time Horizon: ST, MT; Expected Impact: Medium)
  - Main impacts: Hurt profitability of service sector firms and SMEs by raising cost of inputs.
  - Recommended actions: Provide targeted fiscal support to affected firms.
- Higher frequency and severity of natural disasters related to climate change (Likelihood: Medium; Time Horizon: MT; Expected Impact: High)
  - Main impacts: Climate-related losses could reduce real GDP and increase fiscal costs; transition risks could undermine investor confidence.
  - Recommended actions: Strengthen climate adaptation and mitigation efforts and provide relief to affected households.
- Abrupt growth slowdown in China (Likelihood: Medium; Time Horizon: ST, MT; Expected Impact: Medium)
  - Main impacts: Negative spillovers through financial, trade, and commodity-price channels.
  - Recommended actions: Continue to strengthen trade ties with other trading partners.
- Disorderly transformations due to labor market rigidities and untargeted support (Likelihood: Medium; Time Horizon: MT; Expected Impact: High)
  - Main impacts: The number of zombie firms may increase if untargeted pandemic-related supports remain.
  - Recommended actions: Once the pandemic subsides, measures should shift to targeting viable but illiquid firms with a combination of fiscal and financial policies.
- Bond market stress from a reassessment of sovereign risk (Likelihood: Low; Time Horizon: ST, MT; Expected Impact: High)
  - Main impacts: Increase in the sovereign risk premium would worsen public debt dynamics and cause distress in the financial sector.
  - Recommended actions: Adopt a well-defined fiscal framework to anchor the medium-and long-term debt trajectory.

### Debt Sustainability Analysis (DSA) — assumptions, profile, financing, and stress tests
- Time horizon and baseline assumptions:
  - DSA time horizon extended to 2031 to analyze demographic headwinds.
  - Growth: after strong near-term recovery, real GDP growth gradually converges to estimated potential growth of around 0.5 percent over the medium term; potential growth gradually declines to 0.3 percent by 2030 due to declining labor contribution.
  - Fiscal policy: primary deficit projected to remain high at 7½ percent of GDP in 2022 (incorporating the November 2021 package), decline to around 2 percent in 2024, and increase over the medium term to about 3 percent of GDP in 2031 due to rising health and long-term care expenditures.
  - Monetary and interest rate policy: monetary policy assumed accommodative; inflation (GDP deflator) assumed to rise gradually to around 1 percent; nominal interest rate on 10-year JGBs assumed to reach 2 percent by 2030; nominal effective interest rate assumed to increase to 1.1 percent in 2031 (implying an interest rate-growth differential of -0.2 percent).
- Debt profile and composition:
  - Share of short-term debt in total public debt fell in 2021 by 2.5 percentage points, but remains high relative to pre-COVID level after a 5.3 ppt increase in 2020.
  - 10-year bond yield has been at an extremely low level with a negative spread against U.S. Treasuries.
  - No direct exchange rate risks as all JGBs are denominated in yen.
  - Among domestic creditors, the share of the Bank of Japan increased over the last decade, reaching about 100 percent of GDP in 2020, while depository corporations' share declined.
  - Share of JGBs held by foreign investors is about 13 percent in 2021.
  - External financing requirement was 16 percent of GDP in 2021.
- Debt coverage and financial assets:
  - Debt coverage is general government. Gross debt is the main indicator, but net debt is important given large government-held financial assets.
  - Financial-assets-to-GDP ratio rose to 97 percent in 2020 (from 85 percent in 2019) and is projected to decline in the near-term to 87 percent and remain stable thereafter.
- Financing needs:
  - Assumed issuance of additional bonds worth about 4 percent of GDP in 2022 to finance the November 2021 package.
  - Gross financing needs (GFN) is expected to remain elevated at 62 percent of GDP in 2022, before falling below 55 percent of GDP over the medium term.
  - The increased share of short-term debt during the pandemic possibly raises rollover risks in the long run.
- Realism of baseline:
  - Forecast errors for real growth, the primary balance, and inflation have generally remained within the inter-quantile range (25-75) of all countries.
  - The projected three-year adjustment in the cyclically-adjusted primary balance (CAPB) is in the higher range―a percentile rank of 11 percent compared to historical experience for high-debt market access countries, while the three-year average level of CAPB is in the lowest quartile.
- Fan chart and uncertainty:
  - The fan chart signals considerable uncertainty; under the worst quartile case, the debt-to-GDP ratio could be close to 282 percent of GDP in 2027—about 20 percentage points higher than in the baseline.

### Stress test scenarios and quantified impacts
- Primary balance shock:
  - Assumptions: only half of planned fiscal adjustment (in 2023 and 2024) is implemented; additional borrowing increases interest rates by 25 basis points for every 1 percentage point of GDP worsening of the primary deficit.
  - Impact: gross debt-to-GDP ratio higher by around 3 percent of GDP in 2027 compared to baseline; gross financing needs in 2027 about 1 percentage points higher than baseline.
- Growth shock:
  - Assumptions: real output growth rates for 2023 and 2024 reduced by one standard deviation of the 10-year historical changes in growth; primary balance deteriorates and interest rates rise as in the primary balance shock; decline in inflation of 0.25 percentage point per 1-point decrease in growth.
  - Impact: debt ratio about 277 percent of GDP in 2027—around 15 percentage points higher than baseline; gross financing needs in 2027 about 3 percentage points higher than baseline.
- Interest rate shock:
  - Assumptions: a 2 percentage point interest rate increase in 2023 that remains for the rest of the period.
  - Impact: debt-to-GDP ratio higher than baseline by around 6 percentage points in 2027; gross financing needs about 4 percentage points higher; both debt and GFN enter an explosive path as long-term bonds are refinanced at higher rates.
- Interest rate and contingent liability shock:
  - Assumptions: one-time capital injection equivalent to about 10 percent of regional banks’ assets increases government spending by 5.9 percent of GDP; interest rates rise by 25 basis points for each percentage point increase in the primary deficit; combined with real GDP growth shock.
  - Impact: largest among scenarios — debt ratio would increase to around 284 percent of GDP in 2027, about 22 percentage points higher than baseline; gross financing needs in 2027 about 7 percentage points higher than baseline.

### Policy implications (drawn from RAM and DSA findings)
- Maintain monetary accommodation until inflation is sustainably at or above the target.
- Provide targeted fiscal support to affected firms (e.g., those hurt by rising energy and food prices).
- Contain the spread of the virus through vaccination and testing; enhance supply chain resilience.
- Once the pandemic subsides, shift measures to target viable but illiquid firms with a combination of fiscal and financial policies to avoid propagating zombie firms.
- Strengthen climate adaptation and mitigation efforts and provide relief to affected households.
- Adopt a well-defined fiscal framework to anchor the medium-and long-term debt trajectory.

*Source: IMF staff estimates.*

### 9.      The analysis reveals heightened uncertainty over Japan’s debt projections, calling for a

### 1jpnea2022001 - 9.      The analysis reveals heightened uncertainty over Japan’s debt projections, calling for a

### Debt projections and heightened uncertainty
- The higher level of public debt post-pandemic makes the path of the debt-to-GDP ratio highly susceptible to relative changes in interest rates and growth rates.
- Shock scenarios indicate:
  - The debt-to-GDP ratio could jump significantly if growth slumps.
  - The debt-to-GDP ratio would rise gradually but persistently if the interest rate increases.
- Elevated uncertainty from the pandemic and the conflict in Ukraine motivates preparing a contingency plan for unfavorable macro-financial developments (e.g., a negative shock to growth and/or a rise in risk premium).

### Drivers of the favorable interest-growth differential and risks to it
- The current favorable interest-growth differential hinges largely on:
  - Domestic investors’ home bias with high domestic saving.
  - The Bank of Japan’s accommodative monetary policy.
- Risks that could reverse the differential include:
  - Recovery from the pandemic altering investor behavior.
  - Exogenous shocks, including a natural disaster.
  - Deteriorating primary balances due to rising age-related expenditures, which could raise debt sustainability concerns among investors and increase the interest-growth differential.

### Policy recommendations and fiscal framework
- A credible, well-specified medium-term fiscal framework could:
  - Help protect investors’ confidence in the sustainability of debt.
  - Promote growth through greater predictability.
- Authorities could consider preparing a contingency plan that is readily implementable in case of unfavorable macro-financial developments.

### Public debt projections, dynamics, and key numeric indicators (baseline and diagnostics)
- Public sector definition: general government.
- Selected baseline projections and indicators (as of February 15, 2022):
  - Nominal gross public debt: 229.9 (2020), 259.0 (2021), 263.1 (2022), 262.5 (2023), 258.3 (2024), 258.7 (2025), 259.4 (2026), 260.5 (2027), 261.8 (2028), 263.2 (2029), 264.8 (2030), 267.0 (2031), 269.3 (2031).
  - Public gross financing needs: 55.5 (2020), 70.3 (2021), 62.0 (2022), 55.5 (2023), 55.3 (2024), 53.5 (2025), 52.9 (2026), 53.8 (2027), 54.0 (2028), 54.2 (2029), 53.0 (2030), 52.2 (2031).
  - Net public debt: 146.3 (2020), 162.4 (2021), 168.8 (2022), 172.1 (2023), 171.0 (2024), 171.4 (2025), 172.1 (2026), 173.2 (2027), 174.5 (2028), 175.9 (2029), 177.6 (2030), 179.7 (2031), 182.1 (2031).
  - Real GDP growth (in percent): 0.9 (2020), -4.5 (2021), 1.6 (2022), 2.4 (2023), 2.3 (2024), 0.8 (2025), 0.7 (2026), 0.5 (2027), 0.4 (2028), 0.4 (2029), 0.4 (2030), 0.3 (2031).
  - Inflation (GDP deflator, in percent): 0.2 (2020), 0.9 (2021), -0.9 (2022), 0.4 (2023), 0.4 (2024), 0.4 (2025), 0.4 (2026), 0.4 (2027), 0.5 (2028), 0.6 (2029), 0.7 (2030), 0.9 (2031), 1.0 (2031).
  - Nominal GDP growth (in percent): 1.1 (2020), -3.6 (2021), 0.7 (2022), 2.8 (2023), 2.8 (2024), 1.2 (2025), 1.1 (2026), 0.9 (2027), 0.9 (2028), 1.0 (2029), 1.1 (2030), 1.2 (2031), 1.3 (2031).
  - Effective interest rate (in percent): 0.9 (2020), 0.7 (2021), 0.6 (2022), 0.6 (2023), 0.5 (2024), 0.5 (2025), 0.5 (2026), 0.5 (2027), 0.5 (2028), 0.6 (2029), 0.8 (2030), 0.9 (2031), 1.1 (2031).
  - Ratings (selected): Moody's A1, S&P's A+u, Fitch AA.
- Contribution to change in gross public sector debt (selected):
  - Change in gross public sector debt (cumulative): 3.4 (2020), 22.9 (2021), 4.1 (2022), -0.6 (2023), -4.3 (2024), 0.4 (2025), 0.7 (2026), 1.1 (2027), 1.3 (2028), 1.4 (2029), 1.7 (2030), 2.2 (2031), 2.3 (2031), 6.2 (cumulative unspecified).
  - Identified debt-creating flows: 3.6 (2020), 18.9 (2021), 6.8 (2022), 1.8 (2023), -2.5 (2024), 0.4 (2025), 0.7 (2026), 1.4 (2027), 1.5 (2028), 1.5 (2029), 1.7 (2030), 2.2 (2031), 2.2 (2031), 11.0 (cumulative unspecified).
  - Primary deficit: 4.1 (2020), 8.3 (2021), 7.0 (2022), 7.4 (2023), 3.3 (2024), 2.3 (2025), 2.3 (2026), 2.4 (2027), 2.4 (2028), 2.5 (2029), 2.7 (2030), 2.8 (2031), 2.9 (2031), 31.0 (cumulative unspecified).
  - Primary (noninterest) revenue and grants (percent of GDP): 31.6 (2020), 34.6 (2021), 34.6 (2022), 34.0 (2023), 33.9 (2024), 33.9 (2025), 33.9 (2026), 33.9 (2027), 33.9 (2028), 33.8 (2029), 33.7 (2030), 33.6 (2031), 33.4 (2031), 33.8 (unspecified).
  - Primary (noninterest) expenditure (percent of GDP): 35.7 (2020), 42.9 (2021), 41.6 (2022), 41.4 (2023), 37.2 (2024), 36.2 (2025), 36.2 (2026), 36.3 (2027), 36.3 (2028), 36.4 (2029), 36.4 (2030), 36.4 (2031), 36.3 (2031), 69.1 (unspecified).
- Automatic debt dynamics (interest rate/growth differential and components):
  - Interest rate/growth differential: -0.5 (2020), 10.6 (2021), -0.3 (2022), -5.7 (2023), -5.8 (2024), -1.9 (2025), -1.6 (2026), -1.0 (2027), -0.8 (2028), -1.0 (2029), -1.0 (2030), -0.7 (2031), -0.7 (2031), -20.1 (cumulative unspecified).
  - Of which: real interest rate: 1.5 (2020), -0.4 (2021), 3.9 (2022), 0.5 (2023), 0.1 (2024), 0.2 (2025), 0.2 (2026), 0.2 (2027), 0.2 (2028), 0.0 (2029), 0.1 (2030), 0.1 (2031), 0.1 (2031), 1.6 (cumulative unspecified).
  - Of which: real GDP growth: -2.0 (2020), 11.0 (2021), -4.2 (2022), -6.1 (2023), -5.9 (2024), -2.0 (2025), -1.8 (2026), -1.2 (2027), -1.0 (2028), -1.0 (2029), -1.0 (2030), -0.8 (2031), -0.8 (2031), -21.7 (cumulative unspecified).
- Alternative scenarios and underlying assumptions (selected):
  - Baseline underlying assumptions (in percent): Real GDP growth 2.4 (2022), 2.3 (2023), 0.8 (2024), 0.7 (2025), 0.5 (2026), 0.4 (2027). Inflation 0.4 across years with 0.5 in 2027. Primary Balance -7.4 (2022), -3.3 (2023), -2.3 (2024), -2.3 (2025), -2.4 (2026), -2.4 (2027). Effective interest rate 0.6 (2022), 0.5 (2023), 0.5 (2024), 0.5 (2025), 0.5 (2026), 0.5 (2027).
  - Historical scenario primary balance: -7.4 (2022), -4.5 (2023), -4.5 (2024), -4.5 (2025), -4.5 (2026), -4.5 (2027).
  - Constant Primary Balance scenario primary balance: -7.4 each year 2022–2027.
- Stress tests demonstrate substantial vulnerabilities:
  - Gross Nominal Public Debt (in percent of GDP) under various stress tests ranges from approximately 245 to 290 (2022–2027) depending on shock.
  - Public Gross Financing Needs (in percent of GDP) under shocks rise into the 48–64 range for 2022–2027 in different scenarios.

### Stress tests and scenario specifics
- Macro-fiscal stress tests include:
  - Primary Balance Shock: example projections show primary balance moving from -7.4 (2022) to -5.4 (2023) to -2.8 (2024) and primary balance paths thereafter.
  - Real GDP Growth Shock: Real GDP growth path example 2.4 (2022), 0.4 (2023), -1.1 (2024), 0.7 (2025), 0.5 (2026), 0.4 (2027).
  - Real Interest Rate Shock: Effective interest rate example 0.6 (2022), 0.5 (2023), 0.8 (2024), 1.0 (2025), 1.1 (2026), 1.3 (2027).
  - Real Exchange Rate Shock, Combined Macro-Fiscal Shock, and Contingent Liability Shock are also modeled with associated paths for real GDP growth, inflation, primary balance, and effective interest rate.
- Figures show percentile bands, predictive density evolution, and heat maps used for risk assessment benchmarks (e.g., debt burden benchmark of 85%, gross financing needs benchmark of 20%).

### Bank of Japan March 2021 monetary policy adjustments (Annex VI)
- Three main policy actions implemented in March 2021 assessment:
  1. Flexibility in purchases of ETFs and J-REITs:
     - Removed the annual target for ETF (JPY6 trillion) and J-REIT (JPY180 billion) purchases while retaining respective annual ceilings of JPY12 trillion and JPY180 billion.
     - BoJ switched all its purchases to TOPIX-linked ETFs.
  2. Specified fluctuation band around the 10-year bond yield target:
     - Clarified the band of +/- 25bps around the 10-year JGB yield target.
     - Introduced “fixed-rate purchase operations for consecutive days” and shifted announcement of bond-buying program from monthly to quarterly; planned to reduce amount of JGBs purchased in 2021Q3.
     - In February 2022, 10-year yield inched closer to the 0.25 percent upper target; BoJ offered unlimited fixed-rate purchases for 10-year JGBs at 0.25 percent.
  3. Enhancements to make deepening negative interest rates feasible and credible:
     - Introduced a new interest scheme compensating financial institutions for reductions in lending margins associated with negative policy rates and to incentivize specific loans.
     - Applied certain interest rates as incentives to reserve balances categorized under three lending classes (Category I, Category II, Category III).
     - Made technical adjustments to the three-tier reserve system to facilitate arbitrage among financial institutions.
- Table (three categories under the BOJ’s interest rate scheme) highlights:
  - Category I: Applied interest rate higher than the absolute value of the policy rate; eligible for Special Operations in Response to COVID-19 when funds provided against loans made by financial institutions on their own.
  - Category II: Applied interest rate equal to the absolute value of the policy rate; eligible for Special Operations in Response to COVID-19 when funds are provided against loans other than those for Category I and against private debt pledged as collateral.
  - Category III: Applied interest rate lower than the absolute value of the policy rate; eligible for fund-provisioning measure to support efforts on climate change and Loan Support Program Operation to Support financial institutions in Disaster Areas.
- Note: Special Funds-Supplying Operations to Facilitate Financing in Response to COVID-19 will be conducted until the end of September 2021 (as specified).

*Source: IMF staff.*

### Annex VII. The  European Experience with

### Annex VII. The European Experience with Negative Interest Rate Policy

### Overview and motivation
- Several central banks in Denmark, the euro area, Sweden, and Switzerland introduced negative interest rate policy (NIRP) in recent years.
- NIRP was introduced as part of a range of unconventional monetary policy measures against the backdrop of persistently weak inflation outlooks and low neutral real interest rates and, in the cases of Denmark and Switzerland, strong currency appreciation pressure.
- European central banks embarked on NIRP earlier than the Bank of Japan and operated with more negative policy rates.

### Transmission and effectiveness
- Empirical evidence from Europe suggests that NIRP has been effective with similar transmission channels as interest rate cuts above zero.
- Observed transmission outcomes:
  - Negative policy rates in Europe had an immediate impact on money market rates and across the full government bond maturity spectrum.
  - Transmission to bank lending rates occurred broadly similar to rate cuts above zero.
  - Bank lending volumes generally increased.
  - Deposit rates dropped less on retail deposits than on corporate deposits.
  - There have been no clear signs of an increase in cash holdings in response to negative interest rates.
  - Empirical studies on the exchange rate channel under NIRP find mixed results, but it appears to have been effective in Denmark and Switzerland.

### Financial stability, bank profitability, and side effects
- Negative side effects of NIRP have so far been contained.
- Increased risk taking, an intended consequence of interest rate cuts, has not raised significant financial stability concerns.
- Average bank profits have not significantly deteriorated in Europe as a result of negative interest rates to date.
- Offsetting factors supporting bank profitability included:
  - Higher loan volumes
  - Greater reliance on fee income including on deposit accounts
  - Lower loan loss provisions
  - Capital gains on securities holdings
- Smaller, more specialized banks appear to have experienced larger declines in profitability.

### Policy assessment and operational design choices
- European central banks have assessed NIRP as successful in achieving their policy objectives.
- The positive effects of NIRP have dominated negative side effects in the European experience, suggesting that the reversal rate at which interest rate cuts are no longer expansionary is significantly below zero in Europe.
- Policymakers have acknowledged the risk of stronger NIRP side effects over time and used operational mitigants:
  - Reserve remuneration tiering (euro area, Switzerland)
  - Absorption of a certain amount of excess liquidity (Denmark, Sweden)
- Comparative point with Japan:
  - In Japan, less than 5 percent of reserves are subject to the negative policy rate, while the share of reserves exempt from negative rates is much smaller in Europe.

### Key takeaways
- NIRP in Europe:
  - Was implemented across multiple central banks (Denmark, euro area, Sweden, Switzerland).
  - Transmitted through standard monetary policy channels with material effects on money markets, government bond yields, bank lending rates, and lending volumes.
  - Produced limited observable adverse side effects so far, though distributional effects across bank types exist.
  - Has been paired with operational measures (tiering, liquidity absorption) to mitigate costs to banks.

*Source: Annex VII. The European Experience with Negative Interest Rate Policy (IMF).*

### Annex X.  Progress on 2017 FSAP Key Recommendations

### Annex X.  Progress on 2017 FSAP Key Recommendations

### Cross-Cutting Issues
- Recommendation: Further raise corporate governance standards to bolster independence of board and oversight functions from senior management across banking and insurance sectors (FSA). Time Frame: NT
  - Update: The Corporate Governance Code was revised in June 2021 to enhance board independence, promote corporate diversity, and address sustainability and ESG. The revised Code increases the required number of independent directors from at least two to at least one-third of the board for prime market listed companies (where necessary, a majority of the board members should be elected as independent directors), and requires establishing nomination and remuneration committees.
- Recommendation: Further develop internal processes to support full risk-based supervision for banks, insurers, and securities firms (FSA, SESC). Time Frame: I
  - Update: The FSA published “Principles of Prudential Policy” in March 2019 and solicited comments on a draft “Supervisory Guideline” in October 2019, clarifying internal supervisory procedures under the new approach.
- Recommendation: Consider enhancing independence of the FSA and BoJ in key supervisory issues (PM, MoF, FSA, BoJ). Time Frame: MT
  - Update: Under consideration by the authorities.

### Systemic Risks
- Recommendation: Develop own supervisory stress testing model for solvency and liquidity risk analysis for banks, solvency risk for insurers, and periodically stress test large exposures (FSA). Time Frame: NT
  - Update: Since 2019, the FSA and BoJ have conducted common stress testing using agency scenarios for major financial institutions. The FSA periodically requests from megabanks lists of credit amounts and internal ratings of domestic and foreign exposures to simulate effects of downgrading credit ratings on credit costs and capital adequacy ratios.
- Recommendation: Continue conducting liquidity stress testing regularly for significant foreign currencies and require banks to hold sufficient counterbalancing capacity, particularly high-quality liquid assets (FSA). Time Frame: I
  - Update: In cooperation with the BoJ, the FSA continued foreign currency liquidity stress tests for three megabanks (using agency scenarios), engaged with the banks on depth and frequency of internal foreign currency liquidity stress tests, and strengthened cooperation with host authorities given large overseas presence of the three megabanks.

### Financial Sector Oversight
- Recommendation: Give the FSA the power to set capital requirements for banks based on specific risk profiles (Gov). Time Frame: I
  - Update: The FSA’s revamped “Early Warning Mechanism” functions similarly to Pillar 2 capital buffers by identifying banks with medium-term profitability or soundness concerns and engaging management to take early remedial actions. The FSA periodically simulates each bank’s (roughly) 5-year core net profit or capital ratio under stressed conditions, conducts in-depth dialogues with management, and, if prospects remain inadequate, conducts governance reviews via on-site inspections or issues business improvement orders.
- Recommendation: Take further steps to implement an economic-value-based solvency regime for insurers (FSA). Time Frame: NT
  - Update: Following the June 2020 Advisory Council recommendations, the FSA aims to conduct annual field testing for all insurers, finalize standards in 2024, and apply new solvency regulations from 2025. The “Insurance Capital Standard” will be introduced as a capital standard for Internationally Active Insurance Groups (IAIGs) in 2025 after a five-year monitoring period from 2020. The FSA released a comprehensive summary of deliberations in June 2021.
- Recommendation: Introduce more specific periodic reporting requirements and more proactive investigations into related party transactions (FSA). Time Frame: I
  - Update: The FSA requires banks transacting with related parties where arm’s-length rules may apply to seek approval; requirements clarified via the Regulation for Enforcement of the Banking Act and supervisory guidelines. The FSA imposes business scope restrictions on banking groups to prevent contamination of heterogeneous risks and assesses the existing framework as sufficient.
- Recommendation: Ensure robust supervision of systemically important securities firms, with sufficient experienced staff and onsite monitoring of overseas operations (FSA, SESC). Time Frame: I
  - Update: The FSA monitors governance, profitability, and risk management for major securities firms through its Securities Firms Monitoring Office (SFMO).
- Recommendation: Enhance recovery plans by including extreme stress scenarios and ensure continuity of critical services and mitigate contagion risks through clearing members (JSCC). Time Frame: I
  - Update: In Listed Derivatives clearing, the JSCC set a cap on the cash call to non-defaulting clearing members after consuming all resources set in the revised scheme.
- Recommendation: Address recovery planning issues on regulation for central counterparties (FSA). Time Frame: I
  - Update: Under consideration by the authorities.

### Macroprudential Policy
- Recommendation: Clarify the mandate of the Council for Cooperation on Financial Stability (FSA, BoJ). Time Frame: NT
  - Update: The Council has convened bi-annually since 2014 (most recently April and October 2021) to exchange views on the financial system and markets and strengthen cooperation on macroprudential policy. Lower-level liaison meetings discuss raising the countercyclical capital buffer (CCyB) and related measures and report to the Council. Since 2020, the FSA and BoJ have coordinated to reduce reporting duplications and achieve higher-quality monitoring.
- Recommendation: Consider proactively enhancing the macroprudential toolbox, including sectoral tools (FSA). Time Frame: NT
  - Update: The FSA monitors emerging systemic risks through microprudential supervision with macroeconomic perspective, covering lending to real estate, CLO holdings monitoring, and foreign currency liquidity management jointly with the BoJ. It conducts a systemic risk assessment jointly with the BoJ under the CCyB framework on a quarterly basis, and explicitly specifies indicators and the overall process for determining CCyB rates in supervisory guidelines.
- Recommendation: Continue to broaden and deepen the scope of systemic risk assessments (FSA, BoJ). Time Frame: NT
  - Update: The FSA established dedicated monitoring teams for nine major banking groups (including G-SIBs and D-SIBs), five major securities companies, and a team for Fintech companies to address evolving risks including climate change risks, expansion of overseas operations, declining profitability of regional banks, and emergence of new players.

### Crisis Management, Resolution, and Financial Safety Nets
- Recommendation: Strengthen resolution framework by removing ambiguities in choice of tools, introduce statutory bail-in power, clarify triggers for early entry into resolution, and ensure courts do not hinder resolution (FSA). Time Frame: NT
  - Update: The FSA has made efforts to limit need for temporary public support and its July 2017 report contains recommendations for further strengthening the resolution framework.
- Recommendation: Consider broadening the perimeter of institutions to establish loss-absorbing capacity (FSA). Time Frame: NT
  - Update: The FSA expanded Total Loss-Absorbing Capacity (TLAC) requirements to one D-SIB (March 2021) and will monitor for any new G-SIB designations or Japanese D-SIBs meeting criteria in the future.
- Recommendation: Encourage earlier prompt corrective action and provide a clearer path to resolution (FSA). Time Frame: NT
  - Update: The FSA’s revamped “Early Warning Mechanism” simulates each bank’s (roughly) 5-year core net profit or capital ratio under stressed conditions and conducts in-depth dialogues with management on business outlooks, economic forecasts, revenue diversification, cost reduction plans, capacity to make profits on securities, and capital policies. For banks with inadequate prospects, the FSA may conduct governance reviews via on-site inspections or issue business improvement orders. Measures to provide a clearer path to resolution in the event of insolvency are under consideration by the authorities.
- Recommendation: Enhance crisis preparedness and coordination via an interagency crisis management forum (MoF, Minister for FS, BoJ, FSA, DICJ). Time Frame: NT
  - Update: The FSA and Deposit Insurance Corporation of Japan (DICJ) meet at least once a month since 2016 to operationalize resolution measures. The FSA, BoJ and DICJ have informal consultations and set annual priorities for systemically important financial institutions to enhance resolvability.
- Recommendation: Establish an orderly resolution regime for central counterparties and other FMI operators (FSA). Time Frame: MT
  - Update: Under consideration by the authorities.
- Recommendation: Strengthen framework for provision of emergency liquidity assistance and tighten preconditions for temporary public funding in resolution (MoF, BoJ). Time Frame: NT
  - Update: Under consideration by the authorities.

### Financial Intermediation
- Recommendation: Continue engaging with banks on implications of macroeconomic and demographic trends and take actions when viability concerns are identified for individual institutions (FSA). Time Frame: I
  - Update: The FSA recognizes that regional banks face severe conditions due to COVID-19, continued low interest rates, and an ageing and shrinking population. In “Strategic Priorities July 2021-June 2022,” the FSA enacted measures including amendments to the “Anti-Monopoly Act,” establishment of a grant scheme for regional banks to improve business efficiency through mergers, and promotion of digitalization and regional revitalization.
- Recommendation: Encourage banks to evolve risk management practices in line with new business activities (FSA). Time Frame: NT
  - Update: The FSA encourages regional banks to build capacity to provision in a more forward-looking manner and acknowledges potential vulnerabilities masked by large support programs.
- Recommendation: Encourage regional and Shinkin banks to review cost reduction, consolidation, income diversification, and fee structures to address medium-term profitability concerns (FSA, Gov). Time Frame: NT
  - Update: The BoJ introduced in November 2020 a “Special Deposit Facility to Enhance the Resilience of the Regional Financial System” as a three-year temporary measure for fiscal years ending March 2021-2023. The scheme provides extra interest on current account balances for regional financial institutions that meet requirements (streamlining overhead costs, credible plans for mergers or business integration, acquisitions to strengthen business foundations). Recent amendments to the Banking Act (effective late 2021) provide further flexibility in banks’ business operations. The FSA’s revamped “Early Warning System” encourages targeted measures to address medium-term profitability concerns. Parliament approved legislation in May 2020 exempting M&A between domestic regional banks from the anti-monopoly law when the FSA approves the M&A plan as credibly promoting profitability and enhancing financial services.
- Recommendation: Lower coverage of credit guarantees (SME Agency). Time Frame: MT
  - Update: The government introduced full public credit guarantees for eligible SMEs at the outbreak of the pandemic (eligible where SMEs faced a significant drop in y/y sales). The FSA allowed banks to assign zero risk-weights to such loans and exercised regulatory flexibility allowing banks to adjust/renew terms. The government expanded effective zero interest loans without collateral to private sector banks (interest subsidies paid directly to private banks by the Organization for Small & Medium Enterprises and Regional Innovation).

*Annex X. Progress on 2017 FSAP Key Recommendations — Japan (Staff Report for the 2022 Article IV Consultation — Informational Annex).*

### 2021. Japan has committed to address the limited data availability  to compile Securities Statistics

### 2021. Japan has committed to address the limited data availability to compile Securities Statistics and sectoral accounts

### Data and statistics
- The last mission on the Observance of Standards and Codes (data ROSC) took place in 2005 with a report published in March 2006.
- Table 1. Japan: Table of Common Indicators Required for Surveillance (As of February 28, 2022) — selected entries:
  - Exchange Rates — Date of Latest Observation: Jan. 2022; Date Received: Feb. 2022; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Date of Latest Observation: Sep. 2021; Date Received: Dec. 2021; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M
  - Reserve/Base Money — Date of Latest Observation: Nov. 2021; Date Received: Dec. 2021; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M
  - Broad Money — Date of Latest Observation: Aug. 2021; Date Received: Nov. 2021; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M
  - International Investment Position — Date of Latest Observation: 2021Q3; Date Received: Dec 2021; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q
  - Central Bank Balance Sheet — Date of Latest Observation: Dec. 2021; Date Received: Jan. 2022; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M
  - Consolidated Balance Sheet of the Banking System — Date of Latest Observation: Dec. 2021; Date Received: Jan. 2022; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M
  - Interest Rates — Date of Latest Observation: 02/24/2022; Date Received: 02/28/2022; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: D
  - Consumer Price Index — Date of Latest Observation: Jan. 2022; Date Received: Feb. 2022; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M
  - Revenue, Expenditure, Balance and Composition of Financing – General Government — Date of Latest Observation: 2020; Date Received: March 2021; Frequency of Data: A; Frequency of Reporting: A; Frequency of Publication: A
  - Revenue, Expenditure, Balance and Composition of Financing – Central Government — Date of Latest Observation: 2020; Date Received: March 2021; Frequency of Data: A; Frequency of Reporting: A; Frequency of Publication: A
  - Stocks of Central Government and Central Government-Guaranteed Debt — Date of Latest Observation: 2021Q4; Date Received: Feb. 2022; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q
  - External Current Account Balance — Date of Latest Observation: 2021Q4; Date Received: Feb. 2022; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q
  - Exports and Imports of Goods and Services — Date of Latest Observation: Jan. 2022; Date Received: Feb. 2022; Frequency of Data: M; Frequency of Reporting: M; Frequency of Publication: M
  - GDP/GNP — Date of Latest Observation: 2021Q4; Date Received: Feb. 2022; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q
  - Gross External Debt — Date of Latest Observation: 2021Q4; Date Received: Feb. 2022; Frequency of Data: Q; Frequency of Reporting: Q; Frequency of Publication: Q
- Note: Frequency codes — Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

### Recent economic developments — summary of authorities' view
- Real GDP has nearly recovered to its pre-COVID level.
- From April 2020 to September 2021, state of emergencies was declared four times.
- Risks and uncertainties highlighted:
  - supply constraints
  - an external economic slowdown
  - a resurgence of COVID-19 variants
  - commodity price volatility
  - Russian aggression against Ukraine causing soaring energy and commodity prices and supply chain disruptions

### Fiscal policy
- Government actions and targets:
  - Adopted an economic package in November 2021 and the FY 2022 budget to achieve a virtuous cycle of growth and distribution.
  - November 2021 economic package included pandemic containment policies and set aside five trillion yen in the FY2022 budget as contingency funds to address the pandemic.
  - Policy support shifting towards more targeted measures and facilitating resource reallocation by expanding job training.
  - The Government will pursue expenditure and revenue reform to achieve the fiscal target.
  - Public debt to GDP ratio is expected to be around 217 percent at end-March 2022.
  - Government will pursue reforms in the social security system; from October 2022, out-of-pocket medical expenses will be raised for late-stage elderly with income above a certain level.
  - The Government will continue consolidation efforts to achieve the fiscal target of consolidated (central and local Government) primary balance surplus in FY2025.
- Specific reform measures noted:
  - Addressing one-year-budget principle to improve budget quality.
  - Targeting social spending reforms given structural imbalance from declining birthrate and aging population.

### Monetary policy
- Bank of Japan (BOJ) stance and actions:
  - BOJ will continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, aiming to achieve the price stability target of 2 percent.
  - BOJ will continue policies "as long as it is necessary for maintaining that target in a stable manner."
  - Near-term CPI rise drivers: significant rise in energy prices, pass-through of raw material cost increases, and dissipation of the effects of the reduction in mobile phone charges.
  - Underlying inflationary pressure projected to increase due to improvement in the output gap and a rise in medium- to long-term inflation expectations.
  - BOJ will continue to support financing mainly of firms and maintain market stability through the Special Program to Support Financing in Response to the Novel Coronavirus (COVID-19) and other measures.
  - BOJ will continue to persistently pursue powerful monetary easing to generate a virtuous cycle where wages and prices see sustained increases.
  - Regarding staff recommendations, BOJ considers current framework effective and flexible and does not need to adjust it.

### Financial sector
- Key observations and risks:
  - Japan's financial system has maintained stability on the whole despite the pandemic.
  - Market reactions to Russian aggression against Ukraine have been limited compared to those following the outbreak of the pandemic; market functions have been maintained.
  - No significant impact on the operations of Japanese financial institutions so far.
  - External funding environment remains accommodative, backed by BOJ measures, Government measures, and private sector efforts.
  - BOJ’s macro stress testing indicates Japan's financial system is likely to remain highly robust in case of a future resurgence of COVID-19 or adjustments in global financial markets and emerging economies due to a rise in U.S. long-term interest rates.
  - Risks include prolonged downward pressure on financial institutions' profits due to the low interest rate environment and excess savings in the corporate sector, which could create the risk of a gradual pullback in financial intermediation.
  - Greater vulnerability risks from financial institutions' search for yield behavior deserve attention.
- Policy and regulatory developments:
  - Government support for sustainable business models for regional financial institutions, digitalization for user-oriented services, and attracting funding for net-zero pursuits.
  - Financial Services Agency is developing policy and regulatory framework for stablecoins.
  - BOJ published its Strategy on Climate Change in July 2021 and introduced Climate Response Financing Operations, disbursing loans of more than 2 trillion yen in December 2021.
  - Authorities will continue to strengthen climate financial risk management and support confidence in the financial system amid risks such as cyber-crime.

### Growth strategy and structural reforms
- "New Form of Capitalism" objectives:
  - Focus on digitalization, climate change, economic security, and technology and innovation.
  - Enhance distribution and reduce inequality through raising wages, investing in human capital, and strengthening the middle-class cohort.
  - The grand design and action plan for the "New Form of Capitalism" will be published this spring.
- Labor market and governance reforms:
  - Reforms to promote labor force diversification, female employment, and labor mobility along with pension system reforms.
  - Since April 2021, firms encouraged to secure employment opportunities for older workers up to age 70.
  - "Equal Pay for Equal Work" regulations launched in April 2020; working time regulations in April 2019.
  - Government to support wage increases via expansion of corporate tax credits and minimum wage increases.
  - Continued efforts on corporate governance: revisions to the Corporate Governance Code and Guidelines for Investor and Company Engagement; enhanced disclosure on proportion of females in managerial positions and sustainability reporting.
  - Support for business restructuring, de-regulation in agriculture and for foreign workers, fair sub-contracting, high-quality research environment, FDI promotion via matching opportunities and simplification of procedures.
  - Continued leadership in rule-making in digital areas such as e-commerce.

### Climate change
- Targets and recent performance:
  - Japan has committed to achieving net-zero by 2050.
  - Japan has reduced greenhouse gas emissions for seven consecutive years since FY2014, representing an 18 percent reduction from the base year of FY2013.
- Policy actions:
  - Act on Promotion of Global Warming Countermeasures amended in May 2021, legislating the net-zero target as a basic principle.
  - Government will double climate investment and promote decarbonization while ensuring green investment is a growth driver.
  - Development of "Basic Guidelines on Climate Transition Finance" and pathways to achieve net-zero by 2050 for high-emitting sectors to promote transition finance.
  - Forthcoming Clean Energy Strategy will present the overall outlook of transformation toward a net-zero economy and society.
  - Government will continue comprehensive analysis of regional decarbonization, individual lifestyle changes, green finance, and carbon pricing.

### Digitalization
- Priorities and initiatives:
  - Government actively promoting digitalization with a user-centric focus to enhance productivity.
  - Digital Agency established in September 2021 to promote rules and infrastructure from the user's perspective.
  - Government will review around 40,000 regulations under the guiding principle of digitalization.
  - Encourage new markets with new rules in drones, autonomous vehicles, healthcare, and education.
  - Promote digitalization of administrative services: open data, public platforms, and online services.
  - Law for registration of individuals’ public benefits-receiving account enacted in May 2021 enables prompt payment of benefits and subsidies with registered account data.
  - Strengthening risk management and responses to cyber-attacks while addressing user convenience and security aspects.

### External sector
- Authorities' assessment and views:
  - Authorities agree with staff’s preliminary assessment that the projected 2021 current account (CA) balance is broadly in line with fundamentals and desired policies.
  - Government will continue to promote fiscal consolidation and structural reforms.
  - On EBA methodology: authorities welcome staff’s recent refinements and argue that consideration of the income balance into the CA-REER elasticity separate from the trade balance is consistent with previous arguments.
  - Authorities note the relationship between REER and the income balance is not significant and that Japan's current account surplus mainly reflects the income account surplus.
  - Authorities suggest the EBA model and its assumption on a strong linkage between the exchange rate and the current account balance assessment should be reviewed.

### Conclusion
- Authorities value close collaboration with the Fund and look forward to deepening discussions to tackle domestic and international macroeconomic challenges.
- Authorities thanked the Mission Chief, Mr. Salgado, and his team for their insightful analysis and policy discussions presented in the Staff Report.

*Source: 1jpnea2022001 - 2021. Japan has committed to address the limited data availability to compile Securities Statistics*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1jpnea2022001.pdf_