Japan's Economic Outlook in Five Charts

IMF News, November 28, 2018

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Japan has had an extended period of strong economic growth driven by a mix of export growth, private investment, and consumption.
After a temporary soft patch earlier in the year, GDP growth is expected to remain above its estimated potential in 2018 at 1.1 percent.
Financial conditions overall remain generally favorable.
The Bank of Japan’s (BoJ’s) monetary policy tools:
- negative interest rate policy (for short-term rates);
- yield curve control framework targeting the 10-year Japanese Government Bond (JGB) yield at near zero;
- massive expansion of its balance sheet through purchases of JGBs, corporate bonds, real estate investment trusts, and exchange traded funds.
Inflation dynamics:
- Inflation has gained momentum on the back of higher energy prices but—despite a very tight labor market—remains below the BoJ’s 2 percent target.
- Following a tax-induced spike in 2020, inflation will rise over the medium term, but likely remain below the BoJ’s 2 percent target.
- Part of the inflation inertia reflects Japan’s long experience with virtually no inflation and inflation expectations closely linked to that experience.

Policy and labor market outcomes:
- Six years of “Abenomics” saw lower fiscal deficits, near-record unemployment, and higher female labor force participation.
- Japan's parliament passed labor market legislation to:
- set a legal cap on overtime work;
- ensure equal treatment for regular and nonregular workers;
- exempt skilled professional workers from working-hour regulations.
- The effectiveness of the new laws will hinge on implementation.
- Efforts to bring more workers into the labor force are meeting with success, with women, older workers, and inflows of foreign labor contributing to the gains.
- Corporate governance reforms have advanced, and the trade agenda has accelerated with two new trade agreements.
Demographic pressures:
- By 2050 the number of aged dependents per worker will rise to about 75 percent, the highest of any country.
- Over the next four decades the share of the population aged 65 years and older will rise from its current three-in-ten persons to almost four-in-ten persons.
- The aging and shrinking workforce will depress growth and productivity due to a shrinking and aging labor force and a shift toward consumption.
- Fiscal challenges will magnify with rising age-related government spending and a shrinking tax base.

Downside risks to growth:
- The planned consumption tax increase in 2019 could hinder near-term growth momentum.
- Weaker global growth and heightened uncertainty—from trade or geopolitical tensions—could undermine growth, trigger yen appreciation and equity market shocks, and renew deflationary risks.
Fiscal timeline and sustainability:
- The target date for a return to fiscal surplus was reset from FY2020 to FY2025.
- A solid plan for fiscal consolidation over the medium and long term is needed to address demographic challenges and lessen debt sustainability risks.
- The planned increase in the consumption tax rate in 2019 will bring much-needed revenue.
- A concrete strategy is needed to stabilize and reduce the large public debt over the medium and long-term—particularly given an aging population, labor force decline, and rising expenditures for healthcare and other social security programs.

Six years (duration of “Abenomics” outcomes referenced).
2018 GDP growth expected at 1.1 percent.
BoJ inflation target: 2 percent.
Tax-induced inflation spike: 2020.
Planned consumption tax increase: 2019.
Fiscal surplus target reset from FY2020 to FY2025.
By 2050: aged dependents per worker about 75 percent.
Share aged 65+ rising from current three-in-ten persons to almost four-in-ten persons over the next four decades.

Source: Japan's Economic Outlook in Five Charts (November 28, 2018)