Transcript of a Conference Call on Japan – 2013 Article IV Consultation

August 5, 2013

Washington, D.C.
Monday, August 5, 2013

MS. UTSUNOMIYA: Hello, and thank you all for joining this press conference call on the publication of the 2013 Japan Article IV Staff Report. I am Keiko Utsunomiya, from the IMF Communications Department.

I'd like to introduce Mr. Jerry Schiff, Deputy Director of the IMF’s Asia and Pacific Department. He's also the Mission Chief for Japan. Jerry will give us brief opening remarks, followed by Q&A from you. Thank you.

MR. SCHIFF: Thanks to everybody for participating, and good morning and good evening, wherever you are. Let me start by saying that the 2013 Article IV consultation for Japan was conducted against the backdrop of really dramatic changes in Japan's economic policy. I think you're all well aware that the Japanese authorities have embarked on an ambitious agenda to raise growth and end deflation. These are the so-called “Three Arrows of Abenomics” comprising aggressive monetary easing, flexible fiscal policy and structural reforms to raise potential growth.

The IMF supports this policy package, but it has emphasized, and will continue to, that success depends on the implementation of all three arrows.

The new policies, especially the new monetary policy framework and fiscal stimulus are having a positive impact so far. Growth is robust at around 4 percent on an annual basis, the labor market and private credit are strengthening, and actual and expected inflation are beginning to rise. But, for this positive momentum to be sustained and built upon, the government really needs to begin to put in place a strategy to raise growth in a permanent way, and to develop a credible plan to address the large and growing public debt burden.

While these policies, the so-called second and third arrows, would have their full impact only over the medium term, we think that they can already begin now to raise confidence in the reform process, and therefore to contribute to much needed investment and wage growth. On structural reforms, we've emphasized a number of areas, including deregulation in agriculture and services, raising labor market participation of women, reducing the duality of the labor market, enhancing the ability of the financial sector to support growth, and further relaxing limits to immigration.

We've also highlighted that these reforms can have important synergies, so moving ahead on a broad package would be more effective than a piecemeal approach.

On fiscal adjustment, we strongly support the plan to raise the consumption tax from 5 to 10 percent between now and 2015. We think this approach balances in an appropriate way the desire to have fiscal adjustment be gradual with the need for the government to establish credibility now in its efforts to bring the debt burden down. We estimate that, beyond the consumption tax increase, another 5 percent of GDP in fiscal adjustment will be needed over the medium term to begin to bring debt as a share of GDP down` We've offered a number of suggestions in our report, but there are many other possibilities, as well, and we think that what's really needed is a balanced approach that relies both on revenue and expenditure and that moves forward in a gradual and credible way.

If the government pursues comprehensive reforms together with the new monetary policy framework, we think it's likely that we will see a faster growing and more dynamic Japanese economy. We think this would tend to bring the yen back towards its long-run equilibrium value from its current moderately undervalued position.

A stronger Japanese economy would clearly also be good for the global economy, but an incomplete version of Abenomics would be unlikely to sustain the current strong growth. In such a case, overreliance on fiscal and monetary stimulus could also generate important costs for the rest of the world.

With those opening remarks, I'll stop here and we're happy to take questions.

QUESTIONER: Thanks for taking my question. Just coming back to the issue of the sales tax, there's some talk right now of slowing down the schedule and raising the sales tax more gradually because there's already these fears of growth slowing down. What do you think of that?

MR. SCHIFF: Well, as I mentioned at the top, we think that the plan needs to go ahead as conceived. In other words, to move from 5 to 10 percent in two parts. We don't think that the consumption tax will seriously affect -- I shouldn't say that, it will affect, but we don't think it will knock the recovery off its rails. We think that the consumption tax in 2014 would reduce growth by about .3 to .4 percentage points, and given that there's still a very, very large monetary stimulus in training, and given that the economy is showing good momentum, we think that it can bear the weight of the 3 percentage point hike in the tax.

On the other side, we feel that backtracking now would really put in question the ability of the government, the ability politically of the government to move ahead with fiscal adjustment. In an ideal world, the adjustment could take place very, very gradually, but we think you need to balance that desire for gradual adjustment with some up front action in order to cement credibility, and we think the current plan balances those two things quite well.

MS. UTSUNOMIYA: Okay. I would like to take questions in the room.

QUESTIONER: Thank you. I have two questions. You stressed in the staff report that in the administration's fiscal growth strategy, you don't see concrete measure and the time line. Which area do you think the administration have to make more complete program?

And the second one is, I saw some chart where you compare the baseline scenarios of key areas before and after the Abenomics. Could you elaborate this? If the three arrows will be completed, it push Japan’s GDP up three percentage point at the 2020? Thank you.

MR. SCHIFF: Okay. Thank you very much for those questions. On the reform program, the government has laid out some priorities, we share many of those priorities, and going forward, we understand there's going to be a special session of the Diet, and we presume that, at that point, legislation in key areas will begin to be developed and presented and hopefully passed. So we expect to see more meat put on to the bones of the structural reform program at that time. You asked me which areas. I guess one area would broadly be deregulation, what is planned in that regard. Another would be on labor market reform> As you probably know, the Japanese labor market is characterized by a large share of workers who are very heavily protected, but another large and growing share of workers who don't have good protection, whose wages are lower, and who tend to be less productive because they get less training. So that has a weighing down effect on the whole economy, and we would like to see some steps to address that duality. There's also, as we've also emphasized for the past couple of years, the need to raise women's labor force participation. Some steps have already been taken to try and reduce the waiting list for child care, which is important. We think there are other things that can be done, for example, by eliminating elements of the tax and pension law that make it often not worthwhile for women to work full time. So those are some areas that we're thinking about.

On the second question, I think, this is a model that we use, it's meant to be illustrative, it's not meant to be the main or only way that we make our projections, but we think it's a useful tool. And what that model is meant to show, essentially, is that if all three elements of Abenomics are carried out, then we think that there can be a sustained increase in growth and inflation, and that that would also lead to much better fiscal results over the medium term.

But if you only implement the monetary policy and the fiscal stimulus, which is what we've seen so far, those gains can't be sustained. For example, if you don't address fiscal problems, you'll start to see a rise in risk premia will tend to affect growth in Japan and elsewhere. If you don't have structural reforms, eventually, the impact of stimulus will begin to decline and you won't have that sort of permanent increase in growth. So that's the idea that that model analysis is meant to illustrate.

QUESTIONER: I'd like to ask about the section of the report that advises the Bank of Japan to begin preparing plans for the exit. And I was just hoping you could expand a little on why that should happen now, and maybe address whether or not that could stunt the burgeoning expectations and perhaps create market volatility. Thank you.

MR. SCHIFF: Well, we certainly agree, I think, judging from where your question is coming from, that it's way too early for Japan to be thinking seriously about exiting. Inflation expectations are nowhere near 2 percent yet, and certainly actual inflation is just peaking above the zero baseline, so we're certainly not suggesting that they begin to exit.

All we meant to indicate there is that it would be useful internally for the Bank of Japan to begin to think about how they will exit, whenever that takes place, a year, two years down the line, or three years down the line, we don't really know, and to look closely at, say, the experience of the U.S. and perhaps study their own experience in the past to try and develop some principles, but not to do that in a very public manner. As you say, that probably wouldn't be useful, in terms of generating expectations of higher inflation.

QUESTIONER: About Bank of Japan's exit strategy. Bank of Japan repeatedly said to reporters that it's too early to say something about the exit. But the Fed began to communicate about exit strategy in the very early stages. What's your view about Bank of Japan should do in terms of communicating with press and investors.

MR. SCHIFF: I don't think this would be the time for the Bank of Japan to begin discussing exit. They only just ramped up their monetary easing in April, and it's going to be a process that will take some time, even under the best of circumstances, to raise inflation expectations and to raise inflation. The Bank of Japan has made clear kind of what it's looking for in terms of a target, and that is to reach 2 percent in a stable manner, and that meansthat they will be looking closely at actual inflation, developments in the real economy and at inflation expectations.

And when they feel that they've achieved this target, then they can start thinking about normalizing monetary policy. But I think, at this stage, what's important to emphasize is that that will continue to current policy for as long as necessary. And it would be sending a very mixed message to begin to discuss publicly how and when they're going to be exiting. It's just way off in the future.

QUESTIONER: Thank you for taking the question. So, in terms of this spillover effect to nearby countries, specifically on China and Korea-- Korea is mentioned in the report, can you elaborate a little bit more? Since the report was concluded, there's a lot of data coming from China which shows a slow down there, so is there any changes or any concerns on that part? Thank you.

MR. SCHIFF: Thank you, that's a very good question. We're certainly monitoring very closely potential spillovers from Japan. And, earlier, I had said that, from the domestic standpoint, what's really critical is that the three arrows of Abenomics all be implemented, and we think that's the same key in terms of its impact on the global economy. If the new policies are successful in raising growth and making Japan a faster growing and more dynamic economy, we think overall that's going to be good for the global economy, and that will require efforts, not just in terms of monetary policy, but structural reform and fiscal reform.

If there's an incomplete version of Abenomics, then we do see possible important spillovers to other countries. And there, we're thinking, for example, if monetary policy becomes overburdened and Japan's continued growth relies heavily on monetary and exchange rate policy, that will obviously become more problematic for regional partners.

In general, Japan's new policy framework can affect the region in a number of ways, one that I mentioned is faster growth in Japan, which will be good for other countries that export to Japan. The other that, I'm sure you're well aware of, is the impact via the exchange rate. And where Japan competes with other countries in the region, that can be somewhat problematic, but you need to remember, too, that Japan and China are also not joust competitors, but also complementary in many ways, and that Japan provides high-tech inputs into the Asia supply chain. And to the extent that those inputs are cheaper, that actually would be beneficial to China. So I think there's some offsetting effects. Obviously, we need to keep a close watch and continue to urge the Japanese authorities to move ahead on all elements of their plan, and we think if they do that, then that will be a positive for the global economy.

MS. UTSUNOMIYA: Okay. Thank you very much for all your participation.

MR. SCHIFF: Thank you.


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