Opening Remarks by First Deputy Managing Director Gita Gopinath at the Press Conference on the Conclusion of the 2024 Japan Article IV Consultation Mission

IMF News, February 9, 2024

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Published: February 9, 2024

Economic outlook

Output gap closed in mid-2023, meaning demand is now aligned with the economy’s capacity.
Projected 1.0 percent growth in 2024, up slightly from the most recent World Economic Outlook Update thanks to stronger government spending.
Achieving sustained 2-percent inflation looks increasingly likely.
Price increases are now broad-based across goods and services for the first time in three decades.
Wages are growing at their fastest pace since 1995, amid a tight labor market.
Most households and firms now expect inflation to remain above 2 percent going forward.
Import-price effects on inflation will fade; a very strong labor market is expected to drive faster nominal wages, keeping core inflation above the two-percent target until the second half of 2025.

Monetary policy recommendations

Assessment: The BOJ has been appropriately cautious by keeping policy extremely accommodative, given Japan’s history of deflation and mixed signals from recent data.
Recommendation sequence:
- Exit from Yield Curve Control (YCC).
- End the Quantitative and Qualitative Easing (QQE) framework.
- Continue to rollover its maturing JGBs to avoid abrupt shifts in bond markets.
- Then gradually raise the policy interest rate over the next few years.
Operational guidance: Policy shifts should be gradual and well-communicated.

Fiscal policy recommendations

With a closed output gap and high public debt-to-GDP, fiscal policy should be meaningfully tighter.
Long-term projection: The public debt-to-GDP ratio will increase steadily to accommodate age-related spending pressures.
Fiscal consolidation is needed to rebuild fiscal buffers and ensure debt sustainability, underpinned by both revenue and expenditure measures.
Revenue-side options include strengthening financial income taxation for high-income earners.
Expenditure-side measures include limiting untargeted transfers or phasing out energy subsidies.
Going forward, additional expenditure policies should be offset by higher sustainable revenues to pay for them.

Financial sector assessment and recommendations

An in-depth assessment was conducted as part of the Financial Sector Assessment Program.
Stress test results: The financial system is broadly resilient to a range of macro-financial shocks, including a potential rise in foreign and domestic interest rates and a sharp drop in global and domestic growth.
Identified vulnerabilities:
- Sizable securities holdings.
- Foreign currency exposures.
- Signs of overheating in parts of the real estate markets.
Policy implication: These vulnerabilities require close monitoring and underscore the need to further strengthen financial oversight and crisis preparedness frameworks.

Structural reform priorities

Aim: Make the Japanese economy more dynamic, more green, and more inclusive.
Priorities include measures to empower women in the labor market.
Specific policy examples:
- Increased spending on childcare facilities.
- Reforms to make working conditions more flexible.

Opening Remarks by First Deputy Managing Director Gita Gopinath at the Press Conference on the Conclusion of the 2024 Japan Article IV Consultation Mission, Tokyo, Japan, February 9, 2024