Transcript

Transcript of a Press Conference on the Conclusion of the Mission for the 2017 Article IV Consultation with Japan

June 19, 2017

Good afternoon. It’s a pleasure to be back in Tokyo. Over the last few days, I have met with Deputy Prime Minister Aso, 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 our main findings.

This year’s Article IV Consultation—done in tandem with a comprehensive assessment of the financial sector—focused on the opportunity afforded by the present positive economic momentum to push forward with reforms under Abenomics and the new Work Style Reform agenda to secure sustained, and inclusive growth, raise inflation, and achieve fiscal sustainability.

Under current policies, we expect growth of 1.3 percent this year and 0.6 percent next year. Inflation is projected to move upward slowly, but remain below the 2 percent target in the next few years. The financial sector remains stable but banks and insurers face a challenging environment as low interest rates have reduced profitability and led to a search for higher yields, bringing new and less understood risks. Given this context, we feel that the best policy is to make the most of the positive momentum at present and push forward with needed reforms.

A well-coordinated reform package should include continued fiscal and monetary support, with structural reform, income policies, and steps to contain financial sector risks. Key elements should include:

• Labor market reforms to increase productivity and boost wages. Closing gaps between regular and non-regular workers, increasing mobility across firms, and “equal pay for equal work” will be key to boosting overall wages.
• Measures to increase private investment and boost long term growth. Product and service market reforms, further corporate governance reform, and efforts to ensure that credit is available to small and medium size firms will all enhance investment in growth prospects.
• Measures to diversify and enhance labor supply. Further support for female and older workers and increased use of foreign labor are needed. This means eliminating disincentives to full-time work embedded in the tax and social security systems, increasing availability of childcare and nursing facilities, and reducing excessive overtime.
• Coordinated near-term monetary and fiscal support should combine with incomes policies.
• Monetary policy should maintain a sustained accommodative stance, and provide additional easing if downside risks materialize;

The near-term fiscal stance should be at least broadly neutral in 2018, avoiding the scheduled withdrawal of fiscal stimulus. Steady medium-term fiscal consolidation is needed to contain public debt, and should move in line with the evolution of the economy. The 2018 fiscal review is an important opportunity to set sound medium term fiscal targets and define specific budgetary measures.

Income policies such as increasing administratively controlled wages and incentivizing private firms to raise wages should complement and amplify the fiscal and monetary support.

Enhanced financial oversight and strengthened corporate governance among banks and insurers would help contain emerging risks. Crisis management and resolution frameworks could be strengthened, and dialogue should continue with financial institutions on how to adjust to macroeconomic and demographic trends.

This policy package needs to be implemented in a decisive and well-coordinated way. We see this as the best way for to make substantive progress towards the government’s objectives.

Turning to the external position, while the 2016 current account balance was just moderately stronger than warranted by medium-term fundamentals and desirable policies, the real exchange rate appreciated substantially between 2015 and 2016, moving it to a level consistent with medium-term fundamentals. Ultimately, a strong and coordinated set of domestic policies is the best way to secure external balance over the medium term.

Let me stop with these introductory comments and take any questions you may have.

QUESTIONER: Nikkei Shimbun. I would like to raise a question about wage increases. Not only in Japan, but also in the United States and Europe, it is said that in spite of very good corporate earnings, rate increase movement looks to be but slightly sluggish but strong. How do you assess the recent weakness or sluggishness of wage increases in the advanced economies in general? If there is some specific factor in the case of Japan, what is it, and what should be done by the corporate side and by the public sector side?

MR. LIPTON: A very good question. We at the IMF have been looking at wage behavior and wage developments in advanced economies. You may want to take a look at the last World Economic Outlook, which has a chapter on the decline in the share of economic income going to labor, which it finds has been declining for quite some time in many advanced economies, and looks analytically at those developments. I think that you are right that it’s a common feature in advanced economies now, and that it appears to be hard to explain the pace of increase in wages. We will continue to address this question, and I think that we will find that the reasons differ from place to place. In some countries, there is continued economic slack, and with significant slack, there is sluggish wage growth. In other places, there have been changes in institutional arrangements that have not favored labor. Let’s talk about the situation here in Japan. I think that it’s very important that the Work Style Reforms go forward, as we think these are pointed in the right direction; that the elimination of the duality in the labor market between regular and full-time employees and non-regular and part-time employees is eliminated; that there is progress as intended on equal pay for equal work; and that the step that’s being considered to cut back on overtime is instituted. In time, we hope that this set of reforms will go forward and contribute to stronger wage growth. At the same time, as the economy gains momentum, the existing slack in the economy is diminishing, and already Japan is seeing better job growth in terms of the number of jobs and the development of the job applicant ratio, but it is important as part of Japan’s reflation effort that wages begin to rise more in line with what is needed—the return of inflation to the BOJ’s target, strong real GDP growth, and wage growth that is in line with those two developments.

QUESTIONER: Reuters. I have two questions, the first one regarding monetary policy communication. You say that the BOJ should phase out references to annual JGB buying. Does that mean that the IMF is recommending it remove that guidance, and if so, how soon should it be, and how big is the risk of doing so disrupting the market at this stage? My second question is, you talk about the risk of low bank profitability. Part of the reason is the BOJ’s prolonged monetary easing. Wouldn’t further prolonged monetary easing aggravate this problem, and how imminent is the risk of low profitability leading to solvency problems?

MR. LIPTON: First, let me try to address the general point that we think that it is very important that all three arrows of Abenomics are intensified and continued until the strength of the economy is secured and the reflation of the economy is successful as well, and part of that is maintaining the accommodative stance of the Bank of Japan. It has been contributing to the strength of the economy; the reflation process has been slower but progress has been made, and we think that the recent changes in monetary policy, including the yield curve control and the commitment that has been made to bring inflation above target for a period is the right way to go—that it is the right policy, and that it is communicated in the right way. Now, maintaining that accommodation means a continued period of low interest rates, and we understand that that creates a challenging environment for many in the economy, including in the financial sector, both for banks and non-bank financial institutions, but the institutions are adjusting to that and rethinking business models, and I think that process is one that’s bound to continue. However, in the long run, what is most important for the real economy as well as the financial economy is that the policy of Abenomics is sustained to the point of success so that the economy will be strong enough to be generating profit opportunities broadly. That’s well underway; the economy has been gaining momentum and what is necessary now is to solidify that momentum and try to secure success.

QUESTIONER: Financial Times. I have two questions. You seem to recommend no increase in monetary accommodation and simply that a slow decrease in fiscal accommodation. Is it correct that the IMF now thinks that Japan has applied as much stimulus as it can and should and should not be seeking to add further stimulus at this point. Second, the implication of your suggestion that the structural primary balance should be adjusted by 0.5 percent of GDP on average would mean that Japan’s government does not hit its 2020 target for the primary balance to be stable. Is it your recommendation that the Japanese government should abandon its 2020 target for a balanced budget at the primary level?

MR. LIPTON: We’re comfortable with the present stance of monetary and fiscal policy. As I said, the recent changes in monetary policy to add yield curve control and the commitment to bring real inflation above target for a while is a very useful approach that is already showing some success in bringing down volatility in the JGB market and stabilizing the yield curve. That sets the stage for continued progress in reflation, and so what we see as important is the maintenance of the approach that’s being laid out and accompanying it with both a fiscal and a structural policy agenda that will be supportive. Now, you’re right that what we’re recommending in the case of fiscal policy is a gradual period of consolidation. Understanding that Japan’s debt is high, one does of course have to balance the imperative of consolidating in order to maintain market confidence in Japan and weighing that against the other objective of sustaining growth in the economy, and we think that it’s not yet time to be withdrawing stimulus but that that can begin soon and proceed at a pace of about half a percent per year.

QUESTIONER: Frankfurter Allgemeine Zeitung. I have two questions. When you talk about income policy, can you go into more detail on what you really think that Japan should do in that respect? Second, taking a broader point of view, we are in the fifth year of Abenomics. If I listen to what the government says, it means go on, go on, go on. How long so you think that Abenomics should go on in the current form before you will declare that it might not work?

MR. LIPTON: First, on income policy, I think that the Work Style Reforms are the beginning of a set of reforms that can be very meaningful in structurally changing the way in which the labor market functions, and we’re supportive of that. Many of the details have yet to be fully fleshed out. As I mentioned earlier, there are some very promising elements. There will be other elements that need to be included. We believe that equal pay for equal work can make an important contribution in the Japanese economy. Of course, in order to apply that, one needs to be able to make the assessment of what is equal work, and so having clear descriptions of positions and of jobs across the economy and having transparency can play an important role. We believe that the government should be encouraging the private sector to begin thinking more about wage increases that increase at a pace that’s similar to the targeted nominal GDP growth, meaning with a return to the Bank of Japan’s two percent target and continued real growth in the economy. To get to your second point on Abenomics, I think that we should be considering this as something that’s been successful and that should be continued because it’s brought success. The GDP revisions show that in the period 2013-15, the economy was growing more rapidly than was well understood, at roughly double the pace that had been considered the pace of growth using the earlier methodology. The economy now is seeing a turnaround with a pickup in consumption and some pickup in investment. Net exports have been contributing positively. The global economy is going to be helping, surely. Even today’s trade data show a rise in Japan’s international trade, including both exports and imports, so I think the bottom line is that Abenomics has shown positive results, and it should be carried forward, and those results can be expanded upon.

QUESTIONER: Nikkei Asian Review. I have two questions. One is regarding the incomes policy again. I think that last year you went so far as to say the government can introduce a comply and ?? mechanism for profitable companies to raise wages. It seems that you’ve backtracked this year; I was wondering why that is. The second question is that you note that the recent gains to the Japanese economy are vulnerable. How much time does Japan have left to implement these reforms that you’ve put forward?

MR. LIPTON: First, I think that the incomes policy subject has just moved on. The government has begun the Work Style Reforms and our dialogue has been in that context. We’ve talked with them about what that contains, what it might contain, and about speeding up the work in order to reap the gains from Work Style Reforms as soon as possible. The Japanese economy has vulnerabilities, as do many around the world. It’s a time when the global economy is gathering some momentum and that’s providing a positive, but there are certainly plenty of risks that come from the economic realm and from the political and geopolitical realm, and as has happened here before, it is important that there not be stop and go policies with respect to any of the three arrows that might interfere with the gathering momentum of the economy, and it’s for that reason that we’re stressing maintenance of the supportive elements of the three arrows of Abenomics along with a sensible path for fiscal consolidation.

QUESTIONER: Nikkei Shimbun. This year marks the 20^th anniversary of the Asian financial crisis. I understand that you dealt with that crisis, and also the Japanese financial crisis, in the US Treasury. What is the difference between 20 years ago and now in both Japan and Asia more broadly?

MR. LIPTON: There are a number of countries that will be commemorating the 20^th anniversary of the Asian financial crisis this year, and I think the countries most affected by that crisis have a remarkable record to show of reform and of change in their economies—a moving away from economic models and political structures that were impeding growth and flexibility. Whether one looks at Thailand, Korea, or Indonesia, one sees economies that have really changed fundamentally and that are stronger for that. Beyond that, when one looks at the political developments in those countries, one can see that the reforms that were taken created a stable foundation from which the evolution of politics and, in the case of Indonesia, which was just beginning a process of presidential election in a multiparty system where the evolution of democracy has been able to proceed in an environment of stability and growth. So I think that the Asian region has a lot to show for itself. Now of course, Asia has transformed in so many other respects with the rapid growth of the economy in China and the interlinkages that are called the Asian supply chain, so it really is a very different economy. It is an economy with new opportunities for poorer countries to make their way up the economic ladder and join the supply chain. I think that the Asian region has still tremendous promise, and coming back to Japan as one of the largest economies in the world and a key participant in the economy of Asia, Japan has a lot to contribute to Asia.

QUESTIONER: In your statement, you say that BOJ should make public its inflation expectations. I believe that the same recommendation was made last year as well. Can you elaborate as to why this reference was placed in the statement?

MR. LIPTON: We’ve looked at the range of practices of central banks around the world, and I think we find that in central banks where inflation expectations are clearly specified, this is a way of helping markets to understand the policy of a central bank, and because they understand better the context in which policy is being made. They can understand in a sense the models or constructs that policymakers have, and it allows them to better anticipate and understand the meaning of the policies that are being carried out. We have many discussions with the Bank of Japan and we’re always trying to offer suggestions that come from our reading of international experience, but our main conclusion about monetary policy in Japan is that it remains accommodative, and should remain accommodative, and that the recent steps that have been taken to re-specify the modalities of monetary policy—the yield curve control and the pledge to bring inflation above the two percent target really do help advance the process of reflation. Thank you all very much.