Transcript of a Conference Call on Japan

July 23, 2015

Washington, D.C.
Thursday, July 23, 2015


Deputy Director, Asia-Pacific Department
Mission Chief for Japan

Deputy Chief, Japan Division, Asia-Pacific Department

Communications Department

MS. UTSUNOMIYA: Hello. And thank you for participating in the conference call on the conclusion of the 2015 Article IV Consultation with Japan. I’m Keiko Utsunomiya, relations officer for the IMF. The staff report and related documents have been made available to you, which is embargoed until 9:00 a.m. Washington Time, about one hour from now.

With me today is Ms. Kalpana Kochhar, deputy director of the IMF’s Asia and Pacific Department and mission chief for Japan, and also Mr. Dennis Botman, deputy chief of the division in Asia and Pacific Department that includes the team working on Japan.

This conference call is on the record, and the content of the conversation is also under embargo until 9:00 a.m. Washington Time. We will start with a opening remarks by Kalpana.

MS. KOCHHAR: Thank you, Keiko. Welcome everybody to this press conference. You will all have seen the staff report, including the key issues, but let me start by emphasizing a few points that we want to highlight and also provide some details on the outlook and risks.

So, the overarching message of this year's consultation is that Abenomics has lifted Japan out of the doldrums, but it now needs to be reinforced to accomplish desired once-in-a-lifetime economic regime shift. Specifically policies now need to embark on a sustained effort to meet the unprecedented challenges that Japan is facing, which are ending an entrenched deflationary mindset, raising growth in the face of a decline in population and adverse demographics, and restoring fiscal and debt sustainability while maintaining financial stability.

In terms of the outlook for growth, we project growth at 0.8 percent in 2015 and 1.2 percent in 2016, and potential growth over the medium term under current policies we estimate to be about 0.6 percent. Although this near-term growth forecast looks modest, we would like to emphasize that it is above potential and, therefore, we think that the output gap will be closing by early 2017.

Still, we need to emphasize that the risks are on the downside, including from external developments, weaker growth in the United States and China, and global financial turbulence that could lead to safe haven appreciation of the yen, which would take the wind out of the recovery to some degree.

The key domestic risks include weaker than expected real wage growth in the short term and weak domestic demand and incomplete fiscal and structural reforms over the medium term. These scenarios could result in stagnation or stagflation and trigger a jump in JGB yields.

In terms of the outlook for inflation we see several factors that are putting upward pressure on the price level in the near term. These include the recovery of oil prices -- oil and commodity prices from their lows, the lag, the fact of the yen depreciation that took place earlier this year, and, as I said before, the closing of the output gap. Also the tight labor market conditions, the labor shortages in many sectors, could accelerate variable wage price dynamics.

Given this background, we project inflation at about 0.7 percent in calendar year 2015. And under current policies we expect inflation to rise gradually to about 1-1/2 percent over the medium term.

Against this backdrop we have made a strong call to accelerate structural reforms, particularly in the areas where we consider there is the biggest bang for the buck. These areas include the need for more vigorous efforts to raise labor supply, including through foreign labor deregulating domestic markets, backed by further endeavors to raise wages and investment, which would boost confidence and raise domestic demand, facilitate fiscal consolidation, and unburden monetary policy.

In terms of fiscal policy the overarching goal should be to put debt on a downward path through gradual but steady consolidation that does not derail growth and inflation momentum. A credible and concrete medium-term fiscal plan should be based on prudent economic assumptions and identify structural revenue and expenditure measures up front.

As mentioned, actual and expected inflation will remain below the BOJ’s inflation target and monetary policy transmission still is weak. For that reason we ask for the BOJ to stand ready to undertake further easing and provide stronger guidance to markets through enhanced communication. Without deeper structural reforms, even with further easing, reaching the 2 percent inflation target in a stable manner is likely to take longer than envisaged, suggesting that the BOJ should put more emphasis on achieving the inflation target in a stable manner rather than within a specific timeframe.

Finally, in terms of external sector developments, while the 2014 external position was assessed to be broadly in line with fundamentals, subsequent developments and incomplete policies raise the risk of negative spillovers. With the depreciation of the yen relative to its mid-2014 level, further monetary easing without bold structural reforms and a credible medium-term plan could lead to sluggish domestic demand and overreliance on yen depreciation.

Let me stop there and take your questions.

QUESTIONER: Hi, thanks for taking my question. I just wanted to follow up on your recommendations on debt-to-GDP. Can you elaborate on that a little bit? I find it interesting that you’re calling for them to reduce their debt-to-GDP over time while, at the same time, obviously they’re experiencing anemic growth and also anemic potential growth. And I’m wondering why the IMF feels that that’s wise.

I mean, what comes to mind is the research paper the IMF put out recently that said that, you know, in cases of advanced economies it’s not always necessary to produce debt-to-GDP. So just wondering why you feel that policy’s necessary. Thank you.

MS. KOCHHAR: So, first of all, let me say that, yes, you’re right, we talk about advanced economies and the need for fiscal consolidation, but I think we need to put things in perspective. Japan has a debt-to-GDP ratio of 245 percent of GDP, which is unprecedented even amongst -- I’d say probably unprecedented, period.

Now, it’s true that a lot of it is held domestically. There’s a persistent home bias, interest rates have been low, and so the risks have been contained. However, we cannot assume that this will continue in the future.

But I want to also emphasize that we call for putting the debt on a downward path, and as I just said in my opening remarks, but while also balancing the need to maintain growth. We recognize, of course, that the recovery is not yet very strong and that fiscal policy plays a role in supporting growth. But this is the reason why we have been very explicit in calling, for example, for measures in 2017, when the consumption tax is supposed to go into effect in April 2017, that the government should stand ready to take measures to offset the drag on growth that will come from the increase in the consumption tax.

So, in effect, our fiscal policy advice is put in place a concrete and specific plan that will be implemented over the medium term. The other benefit of that, we believe, is that it provides confidence to the private sector about what’s the future path of fiscal policy and, therefore, both for consumption and investment that is a positive.

So, again, balance between growth and consolidation, balance between revenue and expenditure, and the key being be concrete and specific and realistic, so that you’d provide the private sector with confidence to raise demand.

MS. UTSUNOMIYA: Next question, please.

QUESTIONER: Thanks very much. I was interested, in the report you mentioned (inaudible) declines would be beneficial for the economy. I mean, is that really the case given the way (inaudible) is pushing up import costs and food prices and cooling consumption? And if that is the case, would the benefits be mainly from the boost to exports, please?

MR. BOTMAN: Thank you. What we have seen since last September is that exports have finally started to pick up, which we think is a very welcome development. It took a long time for exports to rise. It’s partly related to production off shoring and supply chain effects, but now we finally see the welcome pick up in exports. So you’re right that a lot of people have said do we really have a benefit from the weaker yen, but now we start to see the effects on aggregate demand.

Now, having said that, obviously a further depreciation would be helpful for exports, but also for raising inflation. But, at the same time, we are quite mindful about potential adverse spillovers as well. So what we have called for in our report is a very balanced policy package including standing ready to ease monetary policy, adopting a credible fiscal plan, and ambitious structural reforms so that the recovery and raising inflation does not only rely on monetary policy and the weaker yen.

QUESTIONER: Hi there. Sorry, I joined a little late, so I apologize if you’ve already answered this. I had a quick question about the Bank of Japan. How much scope for more easing do you see there? They’ve done quite a lot already.

MS. KOCHHAR: Yes, hi. We do -- in the report we outline, you know, where we see the possibility of doing further measures. I just wanted to emphasize that we do believe the BOJ has obviously done quite a lot already and we think that it’s important for the other arrows, so to speak, to also be fired in the same strong way, structural reforms especially.

But that said, we think that there is scope for (inaudible), there is scope for further easing. And in the report we talk about the forms that that further easing could take. We mention increased asset purchases and lengthening their duration, which will work on the long end of the yield curve, strengthen the commitments to low interest rates for as long as it takes, you know, something of that nature.

We do think that enhancing communications is an important part of the strategy to guide markets exactly how the BOJ sees the achievement of the inflation targets. In that direction, you may be aware, that the BOJ has made some changes or will make some changes starting early next year to the way that it communicates monetary policy actions. We will wait and see how effective those are, but we do think that explaining markets how the BOJ sees the achievement of the target, what actions would trigger further monetary policy easing, et cetera.

We’ve also discussed with them the possibility of lowering interest rates on excess reserves. All those are outlined in the report.


QUESTIONER: Actually the previous gentleman asked the question I was going to ask, so I’m done. Thank you.

MS. UTSUNOMIYA: Okay. Then we will conclude the conference call. Let me remind you that the content of this conversation and the staff report and related documents are under embargo until 9 a.m. Washington Time, which is about 40 minutes from now.

Thank you again.


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