Press Conference on the Concluding Statement of the 2023 Article IV Mission to Japan

January 26, 2023


Gita Gopinath, First Deputy Managing Director

Ranil Salgado, Mission Chief to Japan


Jennifer Beckman, Senior Communications Officer, IMF

MS. BECKMAN: Good evening and welcome to the press conference for the 2023 IMF Article IV Consultation Mission for Japan. I'm Jennifer Beckman, with the IMF Communications Department, and this evening I'm joined by Gita Gopinath, who's the First Deputy Managing Director of the IMF, and Ranil Salgado, Mission Chief to Japan. Gita is going to begin with some opening remarks, and then we’ll turn to your questions.

MS. GOPINATH: Thank you, Jennifer. Good evening, everyone. We had three themes that we discussed with the government as part of this year’s annual economic check-up on Japan’s economy, what we call our Article IV Consultation.

The first is on the strengthening recovery. Japan is expected to grow at 1.8 percent in 2023, which is a slight upgrade from 1.6 percent in the October World Economic Outlook. As the government has relaxed COVID-19 related restrictions and reopened borders, growth has been boosted by pent-up demand, supply chain improvements and policy support.

Secondly, we discussed policies to meet the 2 percent inflation target. Our discussions focused on the mix of policies to ensure the 2 percent inflation target is met durably without overshooting significantly.

Third, we discussed the need to reduce fiscal vulnerabilities. A credible medium term fiscal consolidation plan will help with the transition to a dynamic, resilient and inclusive economy.

I will flesh out of each of these three topics, beginning with the outlook.

Japan is navigating the recovery from the pandemic and the implications of Russia's war on Ukraine. The government has been gradually relaxing COVID-19 related restrictions and the borders were reopened with very limited restrictions in October. Core inflation has accelerated in recent months with more widespread price increases, recording levels not seen in four decades at 4 percent.

The economic recovery is projected to continue in the near term with the output gap projected to close in 2023. The consumption of services will be supported by savings accumulated during the pandemic. Exports will rise as order backlogs have risen, supply side constraints eased and high corporate profits from a depreciated yen and delays in implementing previous projects will support business investment.

Now, while risks to the economic outlook are balanced, there is very significant uncertainty regarding the inflation outlook and with both upside and downside risks.

Without substantial acceleration in wage growth, Japan's inflation is expected to fall below the 2 percent inflation target by the end of 2024. Hence an overall accommodative monetary policy stance remains appropriate. More flexibility in long term yields would help better manage risks given increased uncertainty about inflation. Prospectively, this could lead to a smoother transition to a neutral monetary policy stance once there is stronger evidence that the inflation target will be durably met. The shorter-term policy rates should remain unchanged and changes in monetary policy settings should be well communicated.

The primary fiscal deficit will stay elevated in 2023 following the adoption of the October 2022 fiscal package. Amid the ongoing recovery, rising inflation, tighter labor markets and closing output gap, fiscal support should be withdrawn more quickly and new measures limited and targeted only to vulnerable households. As government spending pressures continue to rise any additional spending measures should be targeted and come hand in hand with revenue-raising measures.

Over the medium-term, growth-friendly and credible fiscal consolidation is necessary to put public debt on a downward path and to rebuild fiscal buffers. Financial support measures should be limited to viable firms. Labor markets and fiscal reforms are warranted to raise potential growth, reduce gender inequalities and offset the drag from fiscal consolidation. Promoting green and digital investment could help achieve climate targets and reap the benefits of the digital economy.

Now, let me conclude by thanking all our counterparts in the government, Bank of Japan and the private sector for very open, very productive discussions. We have learned a lot. And also, let me say that at the IMF, we are very grateful for Japan's continued leadership in fostering multilateral collaboration and support for the IMF, including our financial resources and capacity development work. Thank you.

MS. BECKMAN: Thank you, Gita. So now we'll turn to your questions about the report. We'll take some questions in the room to start off with, and then we'll turn to questions in Zoom. If you'd like to ask a question in Zoom you can either use the raise my hand function or you can type in the chat and then I will call on you. We have a colleague with a microphone who can take the microphone to anyone in the room who would like to start off with a question.

QUESTIONER: I have a question on monetary policy. I have a feeling that it's a bit unusual to see a very precise description of the scenario of accepting monetary policy flexibility and there are a lot of reasons. I'm just wondering why you do in that way. What kind of time frame do you foresee for these measures?

MS. GOPINATH: As we see it, Japan's inflation could be at an inflection point, which is good news, because we could see inflation moving durably to the inflation target. As of now, we believe that we don't have strong enough evidence that inflation at 2 percent will be durably achieved. Of course, right now inflation of 4 percent is much higher than in previous decades. But for inflation to be durably at 2 percent, you need much greater wage growth so that it stays at 2 percent. Our projections are for inflation to peak in the first quarter of this year and then decline and by the end of 2024 to be slightly below the inflation target. So there's a lot of uncertainty around inflation. Japan is unique in the sense of having both significant upside risks but also significant downside risks to inflation. This is why the environment is unique and calls for very carefully thought out policy steps. Given the two-sided nature of the risks to inflation, we see that having more flexibility on long term yields can help at the appropriate time.

MS. BECKMAN: Thank you, Gita. We can take one more question from in the room before I turn to questions on Zoom. So again, raise your hand and a colleague will bring you a microphone so you can ask the question.

QUESTIONER: I would like to ask what is the view of the global economy? What is the view of a slowdown in the global economy and the negative impact for Japan and globally? So maybe this year or next year, there is severe impact is to come?

MS. GOPINATH: We expect global growth to slow in 2023 relative to 2022. But we have seen signs of resilience. Relative to our forecasts in October, we saw stronger growth in the US and in Europe and now China has reopened quite suddenly and that has implications for the forecast. So we expect to see global growth bottom out this year, but then towards the end of the year we should see some improvement and then it further improves into 2024.

In the case of implications for the world, the slowing global demand is reducing external demand for especially countries that rely on exports. But the reduction in global demand has also led to a fall in energy prices, in many countries, including the fact that in Europe the winter has been milder than one was concerned about.

In the case of Japan, have upgraded forecasts for Japan from 1.6 percent to 1.8 percent because of China's reopening and given the strong relations between China and Japan in terms of trade and tourism that has a positive spillover to Japan. Again, overall growth is expected to bottom out this year, but then recovering into 2024.

MS. BECKMAN: Thank you, Gita. So for colleagues who are joining on Zoom, if you prefer to ask a question in Japanese, the interpreters will translate your question. The same is true, obviously, for your colleagues in the room. So if there are any colleagues who would like to ask a question on Zoom, you can either raise your hand or type something in the chat. At the moment I don't have any questions on Zoom, so I'll come back to the room. Would any colleagues like to ask questions in the room?

QUESTIONER: Last year the Japanese government decided to raise defense spending. Your views?

MS. GOPINATH: We expect that there will be spending pressures for the Japanese government. I will not speak specifically to the nature of the spending. But our overall message is that any increase in expenditures should be met with an increase in revenues. This is important given the very elevated level of debt-to-GDP in Japan, and therefore the need for gradual fiscal consolidation. It should be done in a growth friendly manner, but it is important to do that. So any increase in expenditures should be met with an increase in revenues. Ranil, would you like to add something?

MR. SALGADO: So exactly as Gita said, we think we're at a point for the Japanese economy, given the strong recovery from Covid, that it's time that the fiscal deficit will be reduced. As Gita mentioned Japan has a very high level of public debt, it has many spending needs. Longer term, there is population aging.

In the near term, there is important investment needed for the green transformation and digital transformation. So these are the needs, but those need to be matched by increased fiscal revenues so that the deficit starts to come down. Now some of the deficit will come down automatically because of the removal of Covid measures, but we think over the next few years there is further deficit reduction [needed].

MS. BECKMAN: Thank you, Ranil. So, again, if colleagues online would like to ask a question, just raise your hand. We have a question now. If you could turn on your camera and unmute yourself or just unmute yourself and ask the question.

QUESTIONER: Hey, thank you very much. Can you hear me?

MS. BECKMAN: We hear you fine.

QUESTIONER: Thank you. Just a follow up question on the need to have any increase in expenditure met by an increase in revenue. So would you propose that Japan actually increase tax if it sees a chance of a big rise in defense spending or any other expenditure? I ask because I think a lot of lawmakers in Japan would prefer even more of an increase in debt issuance rather than resorting to tax hikes, given worries about Japan's still fragile economic recovery. So if you can just clarify that point, that would be great. Thank you.

MS. GOPINATH: Thank you. I’ll ask Ranil to come in on this.

MR. SALGADO: All right. So as Gita has mentioned, we think the recovery is well in train for the many of the reasons she said in her opening remarks. So we think there's good momentum in the Japanese economy. Of course, there are some downside risks and policy should adjust to any downside risk. But in our baseline we have essentially the economy at potential GDP level during this year. The Bank of Japan has a similar forecast. So in that context, we believe the government should focus on what is needed over the medium-term. And what is needed over the medium-term is Japan already has very high level of public debt, 250% of GDP roughly. So that is the context for which we are saying that fiscal consolidation is needed, which means raising tax revenues or other fiscal revenues, but recurring fiscal revenues to offset any new expenditure initiative. So that's really our recommendation.

MS. BECKMAN: Thank you, Ranil. So we have we have time for possibly two more questions. Right now, there are no questions on Zoom, so I am happy to go back to the room and take a question in the room. Or if a colleague would like to ask a question on Zoom and also take a question from Zoom. Okay. At the moment, I don't have any questions on Zoom or in the room. If there are no questions, we can conclude the press conference for the Concluding Statement for the IMF's Article IV Mission to Japan for 2023. So thank you, all of you, for joining us this evening.

IMF Communications Department

PRESS OFFICER: Jennifer Beckman, Brian Walker

Phone: +1 202 623-7100Email: