IMF Executive Board Concludes 2023 Article IV Consultation with Japan
IMF News, March 31, 2023
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- Published: March 31, 2023
Recent economic performance
- Real GDP increased by 1.1 percent in 2022 and remains below the level in 2019 (on an annual basis).
- Private consumption led the recovery and private investment also rebounded.
- Industrial production recovered strongly during the summer as supply chain constraints due to lockdowns eased.
- Headline inflation has been above 2 percent y/y since April driven by external factors including the lagged effects of higher commodity prices and yen depreciation.
- The current account surplus narrowed to 2.1 percent of GDP in 2022 due to a sharp rise in the value of commodity imports.
- The external position in 2022 is assessed as broadly in line with medium-term fundamentals and desirable policies.
- The banking sector remains resilient, with capital adequacy and liquidity ratios above regulatory requirements, but interest and credit risks have increased.
Near-term outlook and projections
- Growth is expected to accelerate to 1.3 percent in 2023 driven by private consumption and business fixed investment.
- The output gap is projected to close in early 2023.
- Exports will rise as supply side constraints ease and inbound tourists return.
- Inflation is expected to rise further in early 2023 due to the delayed effect of yen depreciation and border reopening before declining again.
- The primary fiscal deficit will stay elevated in 2023 following the adoption of the October 2022 fiscal package.
- The current account surplus is projected to bounce to an average of 2.9 percent of GDP in 2023 driven by lower commodity prices and inbound tourism.
- An aging and declining population will continue to be a major macroeconomic challenge in the medium and long term.
Risks and scenarios
- Downside risks to growth include:
- deepening geo economic fragmentation and geopolitical tensions;
- an abrupt slowdown of the global economy;
- commodity price volatility;
- natural disasters; and
- cyberthreats.
- Additional domestic risk: potential abrupt change of the current monetary policy framework.
- Upside risks to growth: a more robust recovery of consumption, especially services, and a stronger-than-expected recovery of inbound tourism.
- Inflation risks are two-sided, with the upside more prominent in the short term.
Executive Board assessment and policy guidance
- Near-term policy focus:
- Achieving the two percent inflation target durably.
- Preserving financial stability.
- Medium-term policy focus:
- Reducing fiscal vulnerabilities.
- Transitioning to a more dynamic, digitalized, green, and inclusive economy.
- Fiscal policy:
- Growth-friendly fiscal consolidation is warranted to rebuild fiscal buffers and ensure debt sustainability.
- Consolidation should be underpinned by a credible medium-term fiscal framework to reduce the primary deficit and put the debt-to-GDP ratio on a clear downward path.
- Pandemic-related fiscal support should be withdrawn in a timely manner.
- Consolidation efforts should include both revenue and expenditure measures, including better targeted fiscal support to vulnerable households.
- Monetary policy:
- Maintaining an accommodative monetary policy stance remains appropriate to achieve the two percent inflation target durably.
- Many Directors encouraged considering options for introducing more flexibility under the yield curve control framework to better manage risks and address side effects of prolonged easing.
- Many Directors stressed the need to avoid a premature exit from monetary easing and agreed with the authorities that maintaining the current monetary policy framework is appropriate.
- Any changes to monetary policy settings should be well communicated to facilitate smoother transitions and protect financial stability.
- The exchange rate should continue to act as the main shock absorber, limiting foreign exchange interventions to special circumstances, including disorderly market conditions.
- Financial sector:
- Interest-rate and credit risks have increased and warrant close monitoring.
- Consider appropriate implementation of macroprudential policies to curb financial vulnerabilities as they emerge.
- Structural policies:
- Boost income growth, support startups, deepen digitalization, and achieve climate targets.
- Labor market policies should encourage more women and older persons to join the work force, reduce labor market duality, and improve mobility.
- Encourage the Digital Agency to continue coordinating and implementing policies to digitalize the public sector.
- Higher carbon pricing could help achieve climate-related targets in a growth-friendly way and should be accompanied by measures to protect the most vulnerable and enable an orderly transition from high-emission to low-carbon sectors.
Key statistics (selected figures from Table 1: Japan: Selected Economic Indicators, 2019–24)
- Real GDP (percent change): 2019: -0.4; 2020: -4.3; 2021: 2.1; 2022 Est.: 1.1; 2023 Proj.: 1.3; 2024 Proj.: 1.0.
- Private consumption (percent change): 2019: -0.6; 2020: -4.7; 2021: 0.4; 2022: (value not listed in table body).
- Business investment (percent change): 2019: -0.7; 2020: -4.9; 2021: 1.9; 2022: 3.1; 2023: 2.4.
- Headline CPI (period average, percent change): 2019: -0.2; 2020: 2.7; 2021: 2.2.
- Government revenue (percent of GDP): 2019: 34.2; 2020: 35.5; 2021: 36.6; 2022: 36.2; 2023: 35.7; 2024: 35.4.
- Government expenditure (percent of GDP): 2019: 37.3; 2020: 44.6; 2021: 42.8; 2022: 44.0; 2023: 42.1; 2024: 39.4.
- Overall balance (percent of GDP): 2019: -3.0; 2020: -9.1; 2021: -6.2; 2022: -7.8; 2023: -6.4; 2024: -4.0.
- Primary balance (percent of GDP): 2019: -2.4; 2020: -8.4; 2021: -5.6; 2022: -7.5; 2023: -3.8.
- Public debt, gross (percent of GDP): 2019: 236.4; 2020: 258.7; 2021: 255.4; 2022: 261.3; 2023: 258.2; 2024: 256.3.
- Current account balance (billions of USD): 2019: 176.3; 2020: 147.9; 2021: 197.3; 2022: 90.0; 2023: 131.8; 2024: 180.3.
- Current account (percent of GDP): 2019: 3.9; 2020: 3.0.
- Trade balance (billions of USD): 2019: 26.6; 2020: 15.6; 2021: -117.8; 2022: -83.0; 2023: -25.6; 2024: -2.8.
- Exports of goods, f.o.b. (billions of USD): 2019: 695.0; 2020: 630.6; 2021: 748.6; 2022: 751.2; 2023: 779.3; 2024: 814.6.
- Imports of goods, f.o.b. (billions of USD): 2019: 693.6; 2020: 604.0; 2021: 732.9; 2022: 869.1; 2023: 862.3; 2024: 840.2.
- Energy imports (billions of USD): 2019: 131.9; 2020: 89.1; 2021: 127.8; 2022: 194.0; 2023: 162.3.
- Change in reserves (billions of USD): 2019: 25.5; 2020: 10.9; 2021: 62.8; 2022: -47.4; 2023: 11.5.
- Total reserves minus gold (in billions of US$): 2019: 1286.3; 2020: 1348.2; 2021: 1356.2; 2022: 1178.3.
- Yen/dollar rate (period average): 2019: 109.0; 2020: 106.8; 2021: 109.8; 2022: 131.5.
- Real effective exchange rate (ULC-based, 2010=100): 2019: 75.2; 2020: 75.3; 2021: 73.0; 2022: 62.0.
- Population Growth (percent): 2019: -0.3.
- Old-age dependency (percent): 2019: 47.6; 2020: 48.3; 2021: 48.7; 2022: 48.9; 2023: 49.3; 2024: 49.8.
IMF Communications Department, Press Release No. 23/100, March 30, 2023 — Executive Board conclusion of the 2023 Article IV consultation with Japan.
