IMF Executive Board Concludes 2019 Article IV Consultation with Japan

IMF News, February 10, 2020

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Published: February 10, 2020

Economic outlook and recent developments

The Japanese economy is growing above its estimated potential despite a significantly weaker external environment.
Real GDP growth is estimated to be above potential in 2019 at 1.0 percent.
Private consumption and public spending supported growth in the first three quarters of 2019, while exports and export-driven investment softened.
The two-percentage point increase in the consumption tax rate in October 2019 appears to have had less impact than the last rate increase in 2014, due in part to government countermeasures.
The output gap is narrowing and labor markets remain tight, but overall wage growth and inflation expectations remain stagnant.
CPI headline inflation and the BOJ’s core-core inflation (excluding fresh food and energy) have risen in recent months but remain below the Bank of Japan’s two-percent inflation target.
Underlying growth is expected to remain resilient, bolstered by fiscal and monetary support, with near-term inflation reaching about one percent.
Over the medium term, growth is projected to moderate to near potential and the output gap will gradually close; headline inflation is expected to edge up slowly but remain below the BOJ’s two-percent target.

External sector and exchange rates

Japan’s external current account surplus is estimated to have shrunk in 2019 to about 3.3 percent of GDP, reflecting a smaller goods trade balance due to adverse external conditions.
Japan’s income surplus—arising from its large net foreign asset position and high net returns—accounts for the bulk of its current account surplus.
Through November 2019, the yen appreciated by 2.5 percent (in real effective terms) relative to end-2018; markets remain volatile reflecting changes in global risk aversion and the monetary policy stances of major central banks.
The 2019 external position is preliminarily assessed as broadly consistent with medium-term fundamentals and desirable policies.

Executive Board assessment and policy recommendations

Directors welcomed Japan’s resilient economic growth performance despite external headwinds.
Directors noted that inflation remains below target and that downside risks weigh on the outlook, including from adverse demographics and weaker global growth.
Given an aging and shrinking population, Directors emphasized the need to strengthen the mutually reinforcing policies of “Abenomics” and accelerate reforms to achieve sustained high growth, durable reflation, and public debt sustainability.
Monetary policy:
- Monetary policy should remain accommodative.
- Improve coordination with financial sector policies to enhance the sustainability of monetary stimulus and mitigate risks to financial stability.
- Importance of clear communication of policy guidance to markets.
- Current monetary policy framework is considered to be working well, though there may be scope to explore options to strengthen the framework over time.
Financial sector and macroprudential policies:
- Proactively strengthen the resilience of the banking sector.
- Consider tightening macroprudential policies and stand ready to activate the countercyclical capital buffer.
- Continue to improve financial sector supervision and regulation, the risk assessment process, and the macroprudential policy toolkit.
- Commended progress implementing the 2017 FSAP recommendations and engagement with regional financial institutions.
Fiscal policy:
- Welcomed the recent fiscal stimulus package and agreed that a broadly neutral fiscal stance is appropriate for the near term.
- Need for gradual fiscal adjustment and consolidation over time given fast-growing age-related expenditures.
- Recommended a medium-term fiscal framework that is well specified and underpinned by realistic assumptions to help ensure fiscal sustainability, lower policy uncertainty, and increase investor and consumer confidence.
- Consider options to further strengthen the redistribution effects of taxation, improve incentives to reduce energy use, and cushion the impact of the consumption tax rate increase on the most vulnerable.
- Highlighted the need to reform healthcare and public social security programs to improve spending efficiency, pension sustainability, and intergenerational equity.
Structural reforms:
- Welcomed ambitious agenda aimed at supporting reflation, productivity, labor supply, and growth.
- Labor market reforms are a priority, particularly measures to improve the 2018 Work Style Reform and increase participation of female, elderly, and foreign workers.
- Encourage easing regulations on product and service sectors, deepening corporate governance reform, and facilitating alternative financing for small- and medium-sized enterprises.
- Commended authorities for promoting climate change awareness and advancing mitigation and adaptation policies.
External balance and multilateralism:
- Noted that a medium-term fiscal consolidation plan and bolder structural reforms that support domestic demand are needed to maintain external balance.
- Commended the Japanese authorities for their commitment to further advance multilateralism.
Governance and anti-corruption:
- Welcomed progress in combating the supply side of transnational corruption and encouraged further steps to improve enforcement of foreign bribery cases.

Selected economic indicators (highlights)

Nominal GDP: US$ 4,954 Billion (2018)
GDP per capita: US$ 39,166 (2018)
Population: 126 Million (2018)
Quota: SDR 30.8 billion (2018)

Growth (percent change)

Real GDP: 2017: 2.2; 2018: 0.3; 2019 Est.: 1.0; 2020 Proj.: 0.7; 2021 Proj.: 0.5
Domestic demand: 2017: 1.6; 2018: 1.1; 2019 Est.: 0.6
Private consumption: 2017: 1.3; 2018: 0.0; 2019 Est.: -0.1
Business investment: 2017: 4.0; 2018: 2.1; 2019 Est.: 1.7; 2020 Proj.: 3.0
Residential investment: 2017: -6.7; 2018: 2.4; 2019 Est.: -1.7; 2020 Proj.: 0.1
Government consumption: 2017: 0.2; 2018: 0.9; 2019 Est.: 2.8; 2020 Proj.: 0.4
Exports of goods and services: 2017: 6.8; 2018: 3.4; 2019 Est.: -1.8; 2020 Proj.: -0.4; 2021 Proj.: 2.0
Output Gap (annual average): 2017: -0.3; 2018: -0.7

Inflation

Headline CPI (annual average): 2017: 1.2

Government (In percent of GDP)

Revenue: 2018: 33.8; 2019: 34.0; 2020: 34.6
Expenditure: 2018: 37.4; 2019: 37.6; 2020: 38.0
Overall Balance: 2018: -3.6; 2019: -3.5; 2020: -2.8
Primary balance: 2018: -3.3; 2019: -3.4; 2020: -2.9
Public debt, gross: 2018: 237.9; 2019: 239.0; 2020: 239.8; 2021: 241.1

Macro-financial and balance of payments (selected)

Base money (percent change, end-period): 2018: 5.0; 2019: 6.6; 2020: 6.1; 2021: 5.2
Non-financial corporate debt in percent of GDP: 2017: 138.5; 2018: 141.2; 2019: 142.5; 2020: 143.4; 2021: 144.8
Current account balance (in billions of USD): 2017: 202.0; 2018: 175.3; 2019: 170.4; 2020 Proj.: 180.6; 2021 Proj.: 184.8
Current account balance (percent of GDP): 2018: 4.1; 2019: 3.3
Trade balance (in billions of USD): 2018: 44.1; 2019: 11.6; 2020 Proj.: -4.3; 2021 Proj.: -10.1
Exports of goods, f.o.b. (in billions of USD): 2017: 688.9; 2018: 735.9; 2019: 701.3; 2020 Proj.: 681.5; 2021 Proj.: 693.5
Imports of goods, f.o.b. (in billions of USD): 2017: 644.9; 2018: 724.3; 2019: 698.7; 2020 Proj.: 685.9; 2021 Proj.: 703.6
Energy imports (in billions of USD): 2017: 117.8; 2018: 148.5; 2019: 130.7; 2020 Proj.: 124.1; 2021 Proj.: 117.3
Total reserves minus gold (in billions of US$): 2017: 1232.4; 2018: 1239.4; 2019: (value not provided)
Yen/dollar rate: 2017: 112.2; 2018: 110.4
Real effective exchange rate (ULC-based, 2010=100): 2017: 78.7; 2018: 77.6
Real effective exchange rate (CPI-based, 2010=100): 2017: 75.0; 2018: 74.4

Demographic indicators

Population Growth (percent): (values not individually provided in table)
Old-age dependency: 2017: 46.0; 2018: 46.9; 2019: 47.6; 2020: 48.4; 2021: 49.0

IMF Executive Board concluding statement, January 30, 2020.