IMF Executive Board Concludes 2018 Article IV Consultation with Japan
IMF News, November 28, 2018
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- Published: November 28, 2018
Growth and inflation
- The Japanese economy is growing above its estimated potential.
- After a temporary soft patch early in the year, domestic demand recovered in the second quarter.
- Real GDP growth is projected to remain above trend in 2018 at 1.1 percent.
- Headline and core inflation have gained momentum in recent months on the back of higher energy prices but remain well below Bank of Japan’s (BoJ) two percent inflation target.
- Underlying growth is expected to remain solid, notwithstanding the scheduled increase in the consumption tax rate in October 2019.
- Over the medium term, growth is projected to moderate and the output gap close.
- Following a consumption tax-induced spike in 2020, inflation will rise over the medium term, but likely remain below the BoJ’s target.
External sector and exchange rates
- The current account surplus increased marginally in 2017 due to a stronger income balance, but is expected to shrink by the end of 2018 due to smaller goods trade and income balances.
- The real effective exchange rate appreciated slightly in the first nine months of 2018 relative to end-2017.
- The projected 2018 current account balance is preliminarily assessed as in line with the current account level consistent with fundamentals and desirable policies.
- Directors noted that a credible fiscal consolidation plan combined with bolder structural reforms are needed to maintain external balance over the medium term.
- Advancing multilateralism would help mitigate inward spillovers from heightened trade tensions.
Fiscal policy and public debt
- Directors generally underscored the importance of maintaining a neutral fiscal stance to support near-term growth and reflation.
- The authorities plan to implement temporary measures to alleviate the adverse impact of the scheduled consumption tax increase, accompanied by clear communication to the public.
- For the medium term, Directors saw merit in developing a well-specified fiscal framework, based on realistic assumptions, to reduce policy uncertainty and anchor a gradual consolidation path toward debt sustainability while addressing demographic challenges.
- While an independent fiscal institution could be helpful, some Directors saw scope to achieve these objectives within the existing institutional arrangements.
- Selected fiscal and debt indicators (as reported):
- Nominal GDP: US$ 4,873 Billion (2017)
- GDP per capita: US$ 38,444 (2017)
- Population: 127 Million (2017)
- Quota: SDR 30.8 billion (2017)
- General government revenue (percent of GDP): 30.8, 31.6, 33.3, 34.2, 34.1, 33.2
- General government expenditure (percent of GDP): 39.4, 39.5, 38.9, 38.0, 37.8, 37.5, 36.9, 36.0
- Overall Balance (percent of GDP): -8.6, -7.9, -5.6, -3.8, -2.8
- Primary balance (percent of GDP): -7.5, -7.0, -4.9, -3.2, -2.9, -3.3
- Structural primary balance (percent of GDP): -6.3, -6.4, -4.6, -3.6, -3.4
- Public debt, gross (percent of GDP): 229.0, 232.5, 236.1, 231.3, 235.6, 237.6, 238.2, 236.6
Monetary policy and financial sector
- Monetary policy should remain accommodative, possibly for an extended period to successfully reflate the economy, while carefully monitoring and mitigating side-effects.
- Directors stressed that effective communication and forward guidance would help reduce market volatility and guide inflation expectations.
- Directors recognized challenges facing the financial sector from demographic pressures and low interest rates.
- Progress was welcomed on implementing the 2017 FSAP recommendations, in particular the new more forward-looking supervisory framework.
- Directors highlighted the importance of enhancing risk management, financial oversight, and the macroprudential framework.
- They welcomed the authorities’ close engagement with regional financial institutions to help adapt business models to demographic trends.
- Priority areas include facilitating financial institutions’ use of Fintech and strengthening crypto-asset oversight.
Structural reforms and labor market
- Directors welcomed the authorities’ ambitious structural reform agenda aimed at lifting potential growth.
- They stressed the importance of strong government commitment to mutually-supportive reforms, with priority given to labor market reforms to enhance labor supply including from female, older, and foreign workers.
- Recommended actions:
- Eliminate tax and social security disincentives to full-time and regular work.
- Reduce the gender wage gap.
- Increase the availability of childcare and nursing facilities.
- Further deregulate product and services markets, facilitate entry and exit of firms, promote small- and medium-sized enterprises, and deepen corporate governance reform.
Executive Board assessment and additional initiatives
- Executive Directors welcomed Japan’s remarkable economic growth performance, especially in per capita terms, and the prospect of continued above-potential growth in the near term.
- Directors noted that inflation remains below target and that downside risks have risen, notably from the upcoming consumption tax rate increase and deteriorating global conditions.
- Directors commended the authorities for volunteering to participate in the Fund’s initiative to assess efforts to address supply-side of corruption in Japan’s Article IV consultation and looked forward to continued progress in enforcing foreign bribery laws.
Key quantitative indicators (selected series and values as reported)
- Real GDP growth (annual percent change): 2012: 1.5; 2013: 2.0; 2014: 0.4; 2015: 1.4; 2016: 1.0; 2017: 1.7; 2018: 1.1; 2019 Proj.: 0.9
- Output Gap (percent): -3.7, -2.2, -2.6, -2.0, -0.7, -0.3
- Unemployment rate (annual average, percent): 4.3, 4.0, 3.6, 3.1
- Public debt, gross (percent of GDP): 229.0, 232.5, 236.1, 231.3, 235.6, 237.6, 238.2, 236.6
- Non-financial corporate debt (percent of GDP): 143.1, 142.0, 143.0, 137.9, 136.9, 139.7, 146.7, 147.0
- Household debt (percent of disposable income): 98.3, 100.2, 100.8, 100.5, 101.7, 101.1, 101.0
- Current account balance (in billions of USD): 59.7, 45.9, 36.8, 136.4, 194.9, 196.1, 183.7, 196.2
- Trade balance (in billions of USD): -53.9, -90.0, -99.9, -7.4, 51.4, 44.5, 34.7, 43.0
- Exports of goods (in billions of USD): 776.0, 695.0, 699.7, 622.1, 636.3, 689.2, 750.0, 766.6
- Imports of goods (in billions of USD): 829.9, 784.9, 799.7, 629.5, 585.0, 644.8, 715.3, 723.7
- Energy imports (in billions of USD): 272.2, 257.4, 241.8, 133.8, 94.9, 117.8, 153.5, 150.9
- Total reserves minus gold (in billions of US$): 1227.2, 1237.3, 1231.0, 1207.1, 1188.4, 1232.4
- Yen/dollar rate: 79.8, 97.6, 105.9, 121.0, 108.8, 112.2, 109.8, 109.3
- Yen/euro rate: 102.6, 129.6, 140.8, 134.3, 120.4, 126.7, 130.3, 127.9
- Real effective exchange rate (ULC-based, 2010=100): 106.5, 86.3, 78.2, 75.3, 85.1, 78.3
- Real effective exchange rate (CPI-based, 2010=100): 100.6, 80.4, 75.2, 70.2, 79.6, 75.6
- Demographic indicators — Old-age dependency (percent): 39.8, 41.8, 43.5, 44.8, 46.0, 46.9, 47.8
IMF Communications Department — Press Release No. 18/442, November 28, 2018. Executive Board concluded the Article IV consultation with Japan on November 21, 2018.
