Japan Article IV Mission Concluding News Conference Transcript

IMF News, January 28, 2022

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Real GDP growth is expected to increase to 3.3 percent in 2022.
Inflation momentum is expected to strengthen, but:
- Inflation in Japan is likely to remain below the 2 percent target over the next few years.
- Underlying inflation is roughly rising at 0.5 percent.
- The IMF and BOJ expect inflation to continue to rise, but around one percent over the medium term.
- Inflation has been on average about one percent since 2012, up to 2019.

Near-term downside risks:
- Uncertainty around the pandemic (including Omicron) that could trigger supply constraints and weaken domestic and external demand.
- China growth slowdown with trade spillovers across Asia.
- Global monetary tightening (e.g., the Fed) creating market volatility and exchange rate pressures.
Policy recommendations for the near term:
- Maintain policy support until recovery is firmly underway to protect near-term growth and sustain inflation momentum.
- The November fiscal stimulus package is welcomed but could have been more effective if better targeted to lower income families and structural transformation.
- The Bank of Japan’s commitment to maintaining an accommodative monetary policy stance is appropriate.
- BOJ’s more targeted pandemic financial support to small and medium sized non-financial corporates is welcome.
Exchange rate posture:
- Japan’s monetary policy is focused on the inflation target rather than the exchange rate; the exchange rate is an outcome rather than a target.
- Preliminary IMF assessment: the current account in 2021 was in line with fundamentals, and this holds for the Yen exchange rate. Further details will be in the staff report to be discussed in early April.

Objective: increase Japan’s macroeconomic policy space.
Fiscal policy:
- Rebuild fiscal buffers gradually through a credible and detailed medium-term fiscal consolidation strategy that puts debt on a sustainable footing.
Monetary policy:
- Continue BOJ accommodative stance to support inflation and growth.
- Consider further efforts to bolster the durability and communication of monetary policy, building on adjustments following the BOJ’s March 2021 assessment.
Financial sector:
- Mitigate long-standing structural financial vulnerabilities, particularly in regional financial institutions.
- Maintain vigilant financial sector supervision to underpin prolonged monetary support and prevent macro-prudential vulnerabilities.

Green and digital investment should be leveraged to promote sustainable and inclusive growth.
Positive policy commitments:
- Japan’s pledge to achieve carbon neutrality by 2050.
- Mid-term emissions reduction target of 46 percent by 2030.
- Government’s digital transformation strategy to address uneven digitalization and boost productivity.
Recommended structural reforms:
- Labor market reforms to boost labor supply and enhance worker productivity and passthrough of stimulus to wages and prices.
- Policies to increase labor supply and productivity: more flexible working arrangements; training including digital I.T. related skills; deepening corporate governance and regulatory reforms.
- Continue reforms to mobilize investment and improve income distribution.
- Increase female and elderly participation in the labor market to limit demographic headwinds.

Wages:
- Wages have been stagnant in real terms over recent years; weak labor productivity growth and subdued investment and innovation are contributing factors.
- A sustained cycle of wage growth requires productivity-enhancing reforms, rising inflation expectations, continued monetary accommodation, and supportive fiscal policy when needed.
Labor force and demographics:
- Japan faces a long-term demographic challenge: declining population and potential labor force decline.
- Increased participation by women and the elderly has helped limit labor force decline and is key for growth and fiscal sustainability.
- Policies should create conditions for longer productive working lives for the elderly and continue raising female labor force participation.

Definition used: scarring refers to a permanent downshift in post-crisis growth relative to pre-crisis trends.
IMF view: pandemic scarring is unlikely to be significant in Japan because of substantial policy support (employment support, household transfers) that helped firms retain workers and households accumulate savings; these factors limit permanent damage to demand and labor markets.

IMF emphasizes a comprehensive policy package—fiscal, monetary, digital, green, and other growth-enhancing reforms—implemented so elements reinforce each other to achieve growth and distribution objectives.
Staff report with detailed external position analysis will be presented to the Board and discussed in early April.

Transcript: Japan Article IV Mission Concluding News Conference — January 27, 2022