Transcript of Press Briefing on Japan Article IV

IMF News, February 9, 2024

Source details

Canonical URL

Transcript of Press Briefing on Japan Article IV

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Published: February 9, 2024

Economic outlook

• Output gap closed in mid-2023.
• IMF projects 1% growth in 2024.
• IMF reported 1.9% growth for Japan in the prior year.
• Medium-term projection for growth in Japan: 0.4%.
• For the first time in three decades, price increases are broad-based across goods and services.
• Wages are growing at their fastest pace since 1995.
• Most households and firms now expect inflation to remain above 2% going forward.
• IMF expects core inflation to remain above the 2% target until the second half of 2025.
• Yen depreciation of about 9% last year contributed to Japan's nominal GDP in dollars slipping below Germany.

Monetary policy (IMF assessment and advice)

• Unconventional monetary policies have supported recovery and raised inflation expectations but are assessed as no longer needed to achieve the inflation target.
• IMF view: Bank of Japan (BOJ) should:
  • Exit from yield curve control (YCC) and end the quantitative and qualitative easing (QQE) framework.
  • Continue to roll over maturing JGBs to avoid abrupt shifts in bond markets.
  • Gradually raise the policy interest rate over the next few years.
  • Implement policy shifts gradually and with clear communication.
• IMF emphasizes continued caution due to mixed incoming data and remaining downside risks to inflation.
• IMF will monitor March wage data and subsequent data rounds to guide timing; did not specify a terminal short-term policy rate.

Fiscal policy (IMF assessment and advice)

• Output gap closed and public debt to GDP already very high at around 250% of GDP.
• IMF recommends meaningfully tighter fiscal policy now.
• Fiscal consolidation needed to rebuild fiscal buffers and ensure debt sustainability.
• Revenue-side options include strengthening financial income taxation for high income earners.
• Expenditure-side measures include limiting untargeted transfers or phasing out energy subsidies.
• Additional expenditure policies should be offset by higher sustainable revenues.

Financial sector resilience and risks

• IMF conducted an in-depth assessment as part of the Financial Sector Assessment Program (FSAP).
• Stress tests suggest the financial system is broadly resilient to a range of macrofinancial shocks (including rises in foreign and domestic interest rates and sharp drops in global and domestic growth).
• Identified vulnerabilities include:
  • Sizable securities holdings.
  • Foreign currency exposures.
  • Signs of overheating in parts of the real estate market.
• IMF view: System-wide capital and liquidity buffers are strong, but vigilant monitoring and strengthened oversight and crisis preparedness frameworks are needed.
• Direct spillovers from U.S. commercial real estate to Japanese banks assessed as limited given current exposures; larger global financial turmoil could produce substantial indirect spillovers.

Structural reforms and labor market

• Structural reforms recommended to raise medium-term growth and make the economy more dynamic, green, and inclusive.
• Priority measures to increase labor market dynamism and participation:
  • Empower women in the labor market by expanding childcare facilities (notably for children under the age of two).
  • Reform workplace practices to allow more flexible work models (including teleworking).
  • Move away from lifetime employment to facilitate worker reallocation and boost entrepreneurship and startups.
  • Consider further increases in foreign workers as part of the policy mix.
• IMF notes Japan has raised labor force participation, but much of the increase has been in non-regular employment; female leadership remains very limited.

Capital markets and investor considerations

• Japanese equities have reached multi-decade highs; Nikkei 225 increased by nearly 40% since January 2023.
• Factors behind equity strength cited: strong corporate earnings, weak yen, broad-based inflation, and corporate governance reforms by Japan Exchange Group.

Selected Q&A highlights (policy timing, risks, and external factors)

• Timing of BOJ policy normalization:
  • IMF supports a gradual, data-driven approach; March wage data seen as an important near-term indicator.
  • IMF does not set a specific date or terminal rate.
• On risks of being “behind the curve”: IMF judges the BOJ’s gradual, accommodative approach appropriate and does not see a high risk of being behind the curve based on current data.
• On Japan’s GDP ranking and per capita GDP:
  • Nominal GDP in dollars slipped below Germany mainly due to yen depreciation of about 9%.
  • IMF uses purchasing power parity-based exchange rates for world growth comparisons, where Japan remains higher than Germany.
  • Raising medium-term growth requires structural reforms described above.
• On population decline and labor shortages:
  • Declining population trend has already affected Japan; overall labor force has not yet fallen thanks to increased participation.
  • Solutions include productivity-enhancing reforms, greater labor market flexibility, and consideration of increased foreign workers.
• On global geopolitical risks (Gaza and Ukraine) and commodity markets:
  • If conflicts remain contained regionally, spillovers to the global economy should be limited; larger escalation would raise risks and commodity price pressures.
• On fiscal trust and JGBs:
  • IMF does not see an immediate loss of trust in JGBs given low borrowing rates and large domestic demand for JGBs, but stresses the need for consolidation to address long-term debt dynamics and rising future spending needs (defense, green and digital transitions).

Transcript of Press Briefing on Japan Article IV — February 9, 2024. IMFC Communications Department.

References

• Gita Gopinath
• Opening Remarks by First Deputy Managing Director Gita Gopinath at the Press Conference on the Conclusion of the 2024 Japan Article IV Consultation Mission
• Japan: Staff Concluding Statement of the 2024 Article IV Mission
• Germany and the IMF
• Japan and the IMF
• IMF Policy Advice -- A Factsheet
• Transcripts
• PRESS CENTER
• https://www.imf.org/en/home