IMF Executive Board Concludes 2024 Article IV Consultation with Japan
IMF News, May 13, 2024
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- Published: May 13, 2024
Macroeconomic overview and outlook
- The Executive Board concluded the Article IV consultation with Japan on May 6, 2024, including discussion of the Financial Sector Assessment Program (FSAP) exercise for Japan.
- Recent developments:
- Real GDP in 2023Q2 surpassed the peak level in 2019Q3; the output gap is estimated to have closed.
- Headline inflation has been above two percent (y/y) since April 2022.
- Measures of underlying inflation indicate broad-based price increases across products and services for the first time in three decades.
- Passthrough from inflation to wages has started to pick up.
- Current account surplus increased to 3.4 percent of GDP in 2023; the external position in 2023 is assessed as broadly in line with the level implied by medium-term fundamentals and desirable policies.
- Growth projections and inflation path:
- Growth is projected to decelerate to 0.9 percent in 2024 due to fading one-off factors that supported 2023 (including a surge in tourism).
- Consumption is expected to pick up in the latter half of 2024 and 2025 due to rising nominal wages (following the strong Shunto settlement in 2024) and lower headline inflation lifting real wages.
- Core inflation is expected to decline gradually as the effect of higher import prices wanes but is projected to stay above the two-percent target until the second half of 2025.
- Fiscal and external outlook:
- Primary fiscal deficit expected to remain elevated at 6.4 percent in 2024, reflecting the impact of the latest fiscal stimulus package.
- Current account surplus expected to increase slightly to 3.5 percent of GDP supported by exports.
- Long-term challenge:
- An aging and declining population will continue to be a major macroeconomic challenge in the medium to long term.
Risks and scenarios
- Growth risks (broadly balanced):
- Downside: slowdown in the global economy; deepening geoeconomic fragmentation; more volatile food and energy prices; weak consumption related to negative real wage growth; more acute labor shortages; return to a zero-inflation environment.
- Upside: additional recovery of inbound tourism; stronger global economy.
- Inflation risks:
- Upside: backward-looking inflation expectations; significantly strong-than-expected wages following spring wage negotiations.
- Downside: faster decline in global goods and import prices.
Financial sector assessment and vulnerabilities (FSAP findings)
- Systemic resilience:
- The financial system is broadly resilient to a range of adverse macrofinancial shocks, per the FSAP systemic risk analysis.
- Key vulnerabilities and risks:
- Sizable security holdings of financial institutions under mark-to-market accounting.
- Some banks’ notable foreign currency exposures.
- Signs of overheating in parts of the real estate markets.
- Risks from climate change and growing digitalization, including cyber risks, warrant careful monitoring.
- Policy and supervisory implications:
- Financial sector policies have been strengthened in recent years, but further steps are warranted to maintain financial stability in an evolving risk environment.
- Need to fill remaining gaps in the financial sector oversight and crisis management framework.
- Staffing resources need to be increased significantly to enhance the supervision and resolution of financial institutions.
- Potential need for a macroprudential response to vulnerabilities in parts of the real estate sector.
Executive Board assessment and policy recommendations
- Growth and structural policies:
- Directors welcomed continued growth and broad-based price increases and emphasized steadfast policy implementation against low productivity growth due to population aging and labor market rigidity.
- Further structural policies recommended to support fertility, female leaders, startups, and a green economy.
- Labor market reforms prioritized: further expansion of childcare facilities, progress on workstyle reforms, reducing labor market dualism, and greater firm dynamism.
- Fiscal policy:
- Fiscal consolidation is needed to rebuild fiscal buffers and ensure debt sustainability, underpinned by both revenue and expenditure measures.
- Any new spending should be offset by higher revenues or savings elsewhere in the budget given a closed output gap and high debt-to-GDP ratio.
- Growth-friendly fiscal consolidation should be supported by a strengthened and more disciplined medium-term fiscal framework.
- Monetary policy and market functioning:
- Further hikes in the short-term policy rate should proceed at a gradual pace and be data-dependent, given balanced risks to inflation and mixed recent data signals.
- State-contingent purchases of Japanese Government Bonds by the Bank of Japan will help mitigate excessive shifts in yields that could undermine macro-financial stability during the historic policy transition.
- A clear and effective communication strategy is key to underscore factors behind the pace of policy rate increases.
- Japan’s commitment to a flexible exchange rate regime will help absorb shocks and support monetary policy’s focus on price stability.
Key statistics (Table 1 highlights)
- Nominal GDP: US$ 4,213 billion (2023)
- GDP per capita: US$ 33,806 (2023)
- Population: 125 million (2023)
- Quota: SDR 30.8 billion (2023)
- Selected annual real GDP growth (percent change):
- 2020: -4.1
- 2021: 2.6
- 2022: 1.0
- 2023: 1.9
- 2024 (Proj.): 0.9
- 2025 (Proj.): (not explicitly given in table cells for Real GDP growth beyond 2024)
- Inflation and output gap:
- Headline CPI (period average): 2.5
- GDP deflator (period average): 3.8
- Output Gap (latest entries visible): -2.9, -1.6
- Government (percent of GDP):
- Revenue (2023): 37.6
- Expenditure (2023): 41.9
- Overall Balance (2023): -5.8
- Primary balance (2024): -6.4
- Structural primary balance (latest shown): -5.7
- Public debt, gross: 258.3 (2020); 253.9 (2021); 248.7 (2022); 252.4 (2023); 254.6 (2024); 252.6 (2025)
- Macro-financial (end-of-period / period-change):
- Base money: 19.2, 8.5, 6.3
- Broad money: 7.3, 2.9
- Credit to the private sector: 6.1, 4.2, 4.4
- Non-financial corporate debt in percent of GDP: 151.8, 155.0, 159.4, 155.2, 156.8, 156.5
- Balance of payments (in billions of USD and percent of GDP):
- Current account balance (billions): 149.9, 196.4, 84.5, 144.7, 142.6, 149.7
- Percent of GDP (latest shown): 3.9
- Exports of goods and services (billions): 630.6, 749.2, 751.8, 713.2, 728.6, 754.9
- Imports of goods and services (billions): 604.0, 732.7, 869.4, 762.2, 759.9, 783.8
- Energy imports (billions): 89.1, 127.8, 195.5, 152.6, 143.0, 128.9
- Total reserves minus gold (in billions of US$): 1348.2, 1356.2, 1178.3, 1238.5
- Exchange rates (period average / end-of-period entries shown):
- Yen/dollar rate: 106.8, 109.8, 131.5, 140.5
- Yen/euro rate: 121.9, 129.9, 138.6, 152.0
- Real effective exchange rate (ULC-based, 2010=100): 75.3, 73.5, 62.0, 56.4
- Real effective exchange rate (CPI-based, 2010=100): 77.3, 70.7, 61.0, 58.0
- Demographic indicators:
- Population Growth: -0.4
- Old-age dependency: 48.3, 48.7, 48.9, 49.3, 49.8, 50.3
IMF Communications Department, May 13, 2024.
