Transcript of a Press Conference on the Conclusion of the Mission for the 2016 Article IV Consultation with Japan

June 21, 2016

Tokyo, Japan.
June 21, 2016

MR. LIPTON: Thank you very much. Good afternoon, everyone. It’s a pleasure to be back in Tokyo. Over the past few days, I have met with Deputy Prime Minister Aso, Minister Ishihara, Minister Kato, BoJ Governor Kuroda, FSA Commissioner Mori, and other senior officials. You have received a copy of our concluding statement so I will limit my remarks to making a few short comments about our main findings.

Abenomics has made progress in revitalizing the Japanese economy. This year’s consultation however highlighted the continuing challenges that Abenomics faces in the effort to achieve its goals, the objectives of higher growth, higher inflation and fiscal sustainability. Under current policies, we expect growth to be a moderate 0.5 this year and 0.3 percent next year respectively, with inflation rising slightly but remaining well below the 2 percent level in the next few years. Given this outlook, we believe that for Abenomics to achieve its key goals will require a strengthening along each of the key dimensions.

A strengthened package would include:

  • An incomes policies, including a mechanism to encourage profitable companies to increase wages;

  • Reform of the dual labor market to encourage contracts that strike a better balance between job security and wage growth. This would reinforce the incomes policies, help establish the needed positive wage-price dynamics, and raise labor productivity;

  • Additional monetary and fiscal stimulus in the near term to close the output gap and support demand while implementing structural reforms;

  • A medium-term fiscal consolidation plan, including replacing the planned 2019 consumption tax hike with a pre-announced path of small hikes leading to at least 15 percent eventually. That would strike the right balance between supporting growth but making progress with fiscal sustainability.

  • More credible fiscal and monetary policy frameworks over time to improve independence of fiscal projections and BoJ communication and forward guidance;

  • Lastly, stepped up structural reforms to boost growth by raising labor force participation by women and greater recourse to foreign workers, fully implementing TPP, and further deregulating product markets.

We believe that the best way for the authorities to raise the prospects for substantive progress towards their targets is to adopt and implement this policy package, to do it soon and in a decisive and coordinated manner. Without such a strengthening of Abenomics, attempts to achieve the various targets within the timeframe that has been set by the authorities will likely be frustrated, risking further volatility and uncertainty.

In that scenario, policies and timetables will likely need to be reset to be more realistic and to allow for more gradual progress. The reset scenario would require prolonged and larger fiscal adjustment, as nominal growth would be lower; a more flexible timeframe for achieving the inflation target; and reserving further monetary and fiscal stimulus for addressing large adverse shocks that might occur.

Let me end by offering a few comments on the external position. While the 2015 external position was moderately stronger than the level consistent with medium-term fundamentals and desired policies, the appreciation of the real effective exchange rate since the beginning of 2016 has moved its value towards a level broadly consistent with medium-term fundamentals, although that appreciation may undermine the effort to lower deflation risks. Strengthening domestic policies remains the most effective tool to reduce deflation risks and increase resilience.

Let me stop with those introductory comments and take any questions that you might have.

QUESTIONER: Market News International. My question is, do you think Japan’s economy needs further stimulation from the cheaper yen?

MR. LIPTON: No, I just said that we consider the effective exchange rate to be at a level broadly consistent with fundamentals. I think that the exchange rate system here with a flexible exchange rate that is market determined serves the economy well. We would like to see internal balance, the quest to finally eliminate all of the output gap and restore inflation towards the 2 percent target to be something to be attained through domestic fiscal and monetary policies, as contemplated in the Abenomics program.

QUESTIONER: Bloomberg News. You had previously, in the World Economic Outlook, forecast Japan’s 2017 growth for -0.1 percent. It has now been upgraded. I just wondered what accounted for that.

MR. LIPTON: The evolution of quarterly GDP numbers has been moving around. We’ve also been assessing the state of domestic demand growth here. This is combined to generate a new forecast, as I mentioned, of modest positive growth. It is, however, part of a pattern that we do see of potential growth subsiding in the coming years. That is partly the result of the demographic shifts. It is something that can be remedied through strong structural policies that will put people to work in more productive activities. So our forecast for slowing growth is something we believe can be remedied through the policy approach.

QUESTIONER: The Wall Street Journal. I wanted to ask about the income policies section in the recommendations. Is a policy like “comply or explain” mechanism that basically forces companies to raise wages possible in a democracy? Could you talk about how that would be politically possible?

MR. LIPTON: Many countries have had incomes policies at various points. This one would be motivated by the very special circumstances of Japan that, with inflation having the heritage of negative inflation for such a long time and the desire to see it increase. The fact that wages and incomes are such a large fraction of GDP means that it’s very hard to get inflation going again unless wages are rising more in line with the inflation target. The idea isn’t necessarily urging a one-time increase in the real wage, but rather at a time when companies have considerable cash flow, have resources on hand, it might be appropriate to encourage companies to raise wages by more or less inflation plus average productivity growth in order to begin to see all the nominal variables—wages, other costs and prices—moving more rapidly. Our suggestion is that it would be done through suggestion and with companies having to explain their reasons for complying or not complying as part of an effort to try to put a little more muscle into the policy of restoring inflation towards the target.

QUESTIONER: Nikkei Asian Review. In relation to that question, do you actually think companies will comply with those kinds of rules?

MR. LIPTON: Well, let me say, I do not know whether there is receptivity to this idea. This is a proposal we are putting forward here and have discussed and will put forward in our reports. It is a subject well worth discussing. Our perception is that, much of the stasis in inflation at this point comes from the legacy and history of having negative inflation, having very low inflation. People tend to think in terms of constant prices or falling prices. Certainly firms have at this point the cash flow and resources on hand to be providing some wage increases. There are wage increases evident in a wide range of companies across this economy. Our thought is to try to suggest this be a broader practice and that it be more uniform and somewhat more assertive.

QUESTIONER: Singapore Business Times. Following upon wages, wages have lacked in a number of countries as a proportion of national income or corporate profits for some time. Is the situation in Japan worse in this respect you think or is it a universal problem?

MR. LIPTON: I will tell you the truth. I am not sure. I do not know. I cannot give you a numerical comparison. I think there has been certainly a phenomenon of falling labor share across many economies. It is a subject the IMF is studying and will be writing about in our flagship publications in the future. We will try to identify the causes and talk about the consequences. But it is the case here, in the situation where inflation has not been raised to the target, that there is room for some increase in the labor share as part of the effort to restore inflation to the target. What will be in the end the sustained labor and capital shares depend on many factors, including the allocative efficiency of firms, the degree to which there are changes in labor laws, changes in labor practices, channeling of labor to more productive activities. In the end of the day wages will reflect productivity in the long-run. We are not suggesting deviations from that in any sustained way but rather an effort to try to help achieve the goal of reflating the economy to the 2 percent inflation rate.

QUESTIONER: Thank you. This is Asahi Shimbun. I have a question on the consumption tax increase postponement. At the G7 Summit the other day, Prime Minister Abe said the global economy faces the risk of falling into a crisis again. That was given as the reason for postponing the consumption tax hike. I am sure the IMF has been closely watching the world economy. The IMF argues for raising the consumption tax in Japan. What is your opinion on Prime Minister Abe’s view with regard to the consumption tax hike postponement, citing global risk as an excuse?

MR. LIPTON: We understand the motivation for the decision that was taken. Had the consumption tax increase gone into effect, it would in fact on its own have provided some contractionary impulse and that would have needed to be offset in large measure if not totally by other policies to counterbalance that weight. With the decision taken, we think what’s important in the future is that the consumption tax increase be implemented because fiscal sustainability will demand that. But rather than having large steps once in awhile as has been the practice in the past, where those steps can create a difficulty in macroeconomic management because they are so potent, perhaps to have a regular series every year or so of smaller increases which will allow for better management of the macroeconomic path, taking into account the calibration that is needed in order to make sure the fiscal policy is consistent with the macroeconomic needs of the country. We understand the reason for this. We think that, as your question suggested, the global economic environment as it is also was supportive of this decision. What’s important now is trying to find a way to re-slate the consumption tax increases and accomplish them in a way that is consistent with the recovery of growth in the country.

QUESTIONER: Sankei Shimbun. I have three questions regarding the BoJ’s monetary policy. First, as you said earlier, clear communication by the BoJ is one of your recommendations. The BoJ has been trying to achieve surprises. Do you mean there have been problems when it comes to the BoJ’s communication so far? My second question concerns removing specific targets for achieving the price stability target. Like the ECB and FRB, the BoJ should replace current objectives with mid-term objectives. Is that what you have in mind? Third question. At the outset, you mentioned the financial sector is not supporting risk-taking in a sufficient way. Under the negative interest rate policy we have, there is not much demand for financial institutions. That is at least what the financial institutions claim. If they are willing to take risks, can the negative interest rate policy have a potential positive impact on the real economy?

MR. LIPTON: Can you repeat the second question? I did not quite understand your question.

QUESTIONER: The timing for achieving the BoJ’s monetary policy price target or inflation target is by the end of FY2017 according to the BoJ. In your report, you argue for removing a specific target date. Are you saying that the BoJ should replace their targets with mid- to long-term targets like the ECB and FRB?

MR. LIPTON: Let me combine the first and second points because we think of them together. So let me answer the second first. We think that it’s going to be difficult under the present circumstances and with the full array of policies being carried out here for the 2 percent inflation target to be reached in 2017 as I said in my opening remarks. We see the present momentum of the economy and of wage and price setting as leaving inflation below the 2 percent target for some time. We do believe that it makes sense for the BoJ to dedicate itself to achieving the target, but it also makes sense for that to be restated in that efforts will continue until the target is met, rather than having a particular date in mind since it’s very hard to know and to project when that’s going to come about. We fear that as the date comes closer, if the target is not to be reached, the communication with the markets would be complex because the markets will want to know at that point whether the target date would be changed or the policy would be intensified. We think it makes sense soon to have a realistic assessment of the time profile for achieving the target. We think it is very important that the central bank maintains its dedication to achieve the target, that other fiscal and structural policies are put in place to be supportive of achieving that target, but that it is communicated in the way I just said. On your third question, yes there is an inadequate demand for credit, but I think as well, it is puzzling that there is as much liquidity being created and that the various elements of QQE and negative interest rate policies are not generating more risk-taking both in lending and companies. I think our view is that overall the introduction of negative interest rates is a welcome introduction to the set of policies that the BoJ has put in place. An interest rate decrease, whether it is from a positive interest rate to a smaller positive interest rate or to a negative interest rate, is supportive of the economy, that it raises asset prices and creates incentives for investment. We think that is the case with negative interest rates. So this was useful and goes in the direction of encouraging banks to lend and will encourage companies to take risks. That said, we understand that right now yield curves are flat, they have been flat in this country for a very long time because of the underlying economic situation, and as a result, banks are having to adjust their models as they have been doing for many years to live in a world where maturity transformation is not rewarded by a very substantial slope to the yield curve. Taking the question of bank profitability aside, we think that the QQE measures are useful in helping to encourage lending and risk taking.

QUESTIONER: Reuters. I get the impression that you are asking for an overhaul of some important aspects of the Abenomics project. I wonder how confident can we be that the current personnel could carry out this overhaul. Would it not require a different prime minister or a different central bank governor to bring about this type of regime change that you have written about in this report? Thank you.

MR. LIPTON: I think we should not lose sight of the fact that Abenomics has major accomplishments in moving an economy that really had deep problems with growth and disinflation and revitalizing it. I think in each of the three arrow areas there has been progress and early progress. It is clear that bold steps were taken, steps that if you push the clock back to a year or two before Abenomics, very few in this country would have thought politically or even technically possible. I have faith that the government and the central bank can bring change. What we are trying to do is convey our views about what kinds of strengthened policies would be meaningful and useful to undertake.

QUESTIONER: Reuters. You mentioned on page 7 that any further monetary easing could lead to over reliance on depreciation of the yen. Can we assume that currently you do not assess Japan is over relying on monetary policy?

MR. LIPTON: In my opening comments and in what I said, I have tried to suggest that each of the three arrows of Abenomics needs to be strengthened. I think it is the case here as in other countries, in Europe for example, reliance simply on monetary policy is not as effective as a broader what we’ve called a three-pronged approach to supporting the economy with monetary policy, fiscal policy, and structural policy. I think that applies to a range of countries, but it does apply here. So in all of what I have said and in what we have written in this concluding statement, we are suggesting that it really needs to be balanced and mutually reinforcing, that relying on monetary policy alone probably will not produce the desired outcomes.


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