Transcript

Transcript of Press Briefing on Japan Article IV

February 7, 2025

PARTICIPANTS:

Speakers:

GITA GOPINATH

First Deputy Managing Director, IMF

NADA CHOUEIRI 

Deputy Director for the Asia and Pacific Department, Mission Chief for Japan, IMF 

Moderator: 

RANDA ELNAGAR 

Senior Media Officer, IMF 

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MS. ELNAGAR: Good morning and welcome to the IMF’s press conference on the conclusion of the 2025 Article IV consultation mission for Japan. I'm Randa Elnagar with the IMF’s communications department. Today I'm happy to be joined by Ms. Gita Gopinath, First Deputy Managing Director of the IMF. To the left of Gita is Ms. Nada Choueiri, Deputy Director of the Asia and Pacific Department, Mission Chief for Japan. By now you should have received the concluding statement and we shared it under embargo yesterday. After Gita gives her opening remarks, we're going to take your questions. Gita, thank you. 

MS. GOPINATH: Thank you, Randa and good morning to all of you and thank you for joining us as we conclude the 2025 Article IV mission for Japan. I want to start first by thanking the authorities, the Bank of Japan, and also those partners that we worked with in academia, the private sector and labor unions for their collaboration during this Article IV consultation. We appreciate and value our engagement with the IMF team over the past few weeks as we have assessed Japan's economy. Let me start by providing our economic outlook for Japan. We project growth to accelerate to 1 .1 percent in 2025. This is in line with our update that we provided in the January World Economic Outlook. Now because of the declining population this corresponds to a growth in per capita terms of 1 .6 percent. The pickup that we have for 2025 is driven by private consumption as wages are expected to grow faster than inflation and boost household purchasing power. The output gap remains closed meaning that demand is broadly aligned with the economy's capacity. Inflation has been running about the central bank’s target for more than two years and we see it converging to 2 percent by the end of 2025 as global food and oil prices moderate. We expect a tight labor market to keep wages growing in the medium term which will help sustain inflation at the Bank of Japan's 2-percent target. Risks to growth are tilted to the downside. External risks including a slowdown in the global economy, increasing trade restrictions and more volatile commodity prices weigh the outlook, posed risks to the downside. Domestically the main risk is weak consumption if wages continue to be outpaced by inflation. 

In light of this outlook, I would like to touch on three important areas of our policy advice. The first is fiscal policy. We are seeing that the inflationary environment is helping Japan's fiscal performance by boosting tax revenues and this will continue in the short term. That explains in part why the deficit and debt levels are both lower than we expected in our last Article IV. But Japan's debt-to-GDP ratio remains high and this limits the amount of fiscal space available for the government to respond to future shocks such as natural disasters. Now in a few years the public debt-to-GDP ratio will increase steadily because of pressure from rising interest payments and from spending on health and long-term care for an aging population. So, we continue to believe that fiscal consolidation is needed to rebuild fiscal buffers and ensure debt sustainability. This calls for a clear plan that should include both revenue measures and expenditure measures while making fiscal policy more growth friendly. In the short term, this could involve phasing out energy subsidies and by offsetting new spending commitments with higher revenues or savings elsewhere in the budget to pay for them. 

The second policy area is monetary policy. Since we were in Tokyo last year in February for the last Article IV, the Bank of Japan has ended its yield curve control, quantitative and qualitative easing, and negative interest rate policies. Under its simplified framework, it has subsequently delivered two hikes to its policy rate, bringing it to its highest level since 2007. It is also reducing the pace at which it purchases government bonds, which is gradually shrinking the size of its balance sheet. The fact that the normalization process has gone smoothly speaks to the successful job Japan has done in terms of timing its decisions, communicating its approach, and proceeding gradually but firmly. While headline inflation remains above target, we still see signs that underlying inflation including services prices and wages needs support for monetary policy to sustainably converge to the 2-percent target. We support the Bank of Japan's recent policy decision on monetary policy decisions and its data dependent and flexible approach. Accommodation should continue to be withdrawn gradually if the economy continues to evolve in line with the baseline forecast reaching a neutral level by the end of 2027. Given elevated uncertainty about the domestic and global economy, it is appropriate that the Bank of Japan maintain its data dependent approach and its clear communications to anchor market expectations. We think the financial sector has been handling rising interest rates well supported by strong capital and liquidity buffers. While the financial system remains generally resilient, systemic risks have risen slightly since the last Article IV, and in the discussions, we discussed how best to manage them in our statement based on our recently completed financial stability assessment program. 

Finally, the team has focused on how an aging population and new technologies are affecting Japan's labor market. The aging and shrinking of the workforce are contributing to labor shortages in many sectors. The adoption of new technologies like artificial intelligence stands to alleviate some of these labor shortages by enhancing workers productivity. But to ensure this can happen, it will be important to ensure that workers of all ages receive the training they need to fully benefit from these new technologies. Let me end by saying that we are grateful for Japan's continued leadership in the international community for being a champion of international collaboration and for its very strong partnership with the IMF. Thank you. 

MS. ELNAGAR: Thank you Gita. Now we're ready to take your questions. I just want to note that this is about the Japanese economy so the focus is going to be about Japan so please identify yourself and your news organization. 

QUESTIONER: Hi my name is Leika Kihara. I’m Reuters. I have two questions. The first is regarding Japan's inflation. Food and energy prices have surged and pushing up the goods inflation. By contrast, real wage growth and services inflation remain fairly muted. Is the uneven nature of Japan's inflation the problem and is Japan facing the risk of stagflation or as the government says still needs to worry more about a possible return to deflation. That's my first question. 

And my second question is about the Article IV  statement about global spillovers of Japan's monetary policy. I know that ECB continues a rate cut path while the US Federal Reserve appears to be pausing or going slowly and cutting rates. In this environment of diverging path of major central banks, what kind of spillovers can be envisioned by the BOJ's interest rate hikes and what kind of risks should markets and policymakers need to be mindful about. Thank you.

MS. GOPINATH: Thank you. On your question on inflation so indeed services inflation remains below the 2-percent target. This is the reason why it remains appropriate for the Bank of Japan to maintain a accommodative  monetary policy. Now as we see it we've had at this point I would say close to three years of inflation above target for the central bank after having three decades of zero inflation. So we see promising signs that you know there could be a durable shift to a new equilibrium which is at the 2-percent target for inflation. Now that said there is a lot of uncertainty. There are developments both internally and externally that can weigh on what happens with inflation and growth which is why we support the Bank of Japan's approach of moving gradually being data dependent and making decisions seeing how the data for example wage negotiations come up. So we are just to summarize we are the view that we see positive signs of moving durably to the  2-percent target. 

To your question on major central banks and the different interest rate paths they may go down and the implications of that since you asked about the Bank of Japan's interest rate decisions I think we should have recognized especially over the last year the Bank of Japan has taken some very big steps by ending yield curve control moving out of negative interest rates moving to quantitative tightening and all of that has happened very smoothly. So this is for us a very positive sign that in terms of managing what happens in financial markets the Bank of Japan as it continues its very clear communication in terms of what it plans to do depending upon the data and how it comes in that they should be you know that will help maintain orderly market conditions.

MS. ELNAGAR: Thank you Gita. Other questions? Please there is Japanese interpretation if you would like to use and ask in Japanese by the way. 

QUESTIONER: My name is Takashi Umekawa. I'm Bloomberg News and I have a one question about Japan's fiscal condition. The Japanese government has committed to make its primary balance target surplus, but it has been failing for more than 20 years. So could you tell us a little bit about your thought if you have any concern or disappointment maybe? Thank you. 

MS. GOPINATH: So fiscal policy clearly has been a very important area that we've been paying attention to in Japan. Our assessment of fiscal policy uses a slightly different measure. We have a calendar-based measure we look at general government primary deficit. Based on those measures, we have as of now, our prediction is that the primary deficit for the general government will increase slightly from 2 .1 percent in 2024 to 2 .2 percent in 2025. This again is based on the budget that has been sent to the Diet. There are of course negotiations going on in the Diet and we will wait to see what happens in terms of what the actual measures are but our very strong advice is that it is very important for Japan to start fiscal consolidation now. It's not about delaying it so we hope that the discussions that are happening in the Diet would end up with a fiscal position that shows some start to this consolidation process and the reason we put an emphasis on that is because if you look at 2030 and going forward, the interest costs are going to be rising quite significantly and the expenses that are needed for aging populations is also going to go up significantly. So, that's going to put Japanese debt-to-GDP on an increasing path from 2030 onwards and as we know, we are all in an in an environment where we have multiple shocks including natural disasters which is why it's important to build buffers and that requires taking action now in terms of both revenue measures, in terms of expenditure measures, a clear plan, a clear medium -term fiscal framework to put Japan's debt in the medium term on a sustainable basis. 

MS. ELNAGAR: Thank you Gita any other questions in the room if you have an online question on Zoom, please raise your hand I have a few pre-registered questions so I will take please, the gentleman. 

QUESTIONER: Hello, my name is Yoshiaki Nohara. I'm from Bloomberg News. In the report, there's a part talking about higher barriers to trade and cost pressure in major trading  partners could spill over to Japan. I was wondering if you could elaborate how that kind of spillover would happen especially within the context of the recent news about new tariffs and retaliatory measures of new tariffs imposed by the new US administration and some retaliatory actions pledged or taken place by other nations. Thank you. 

MS. ELNAGAR: If you have any other questions on trade please let us know. I have received one already from Nikkei’s Yohei Hirose but if you have any other questions online or in the room about trade and tariffs please raise your hand. 

MS. GOPINATH: So, to your question, we are following the policy announcements, the trade policy announcements. There are many shifts in these policy announcements so we are tracking them quite closely as you know there's a pause in tariffs being placed on Canada and Mexico we have the tariff on China and then we saw the retaliation so we have, we are paying close attention to all of these developments. The consequences of this will depend on several factors. It will depend firstly on the duration for which these measures are in place and again at this point it's quite uncertain what the duration will be for these measures. It will depend upon what kinds of country responses we see what kinds of categories of goods are being impacted so I think it's a bit early to have any very precise analysis of what the consequences can be. Our advice as always has been that it's in the interest of all countries to work together to take care of their disagreements and to ensure there is an enabling environment for international trade. 

MS. ELNAGAR: Thank you Gita any other questions in the room? Otherwise, I'm going to go online. Okay we received a question from Takeshi Kawanami, editor of financial group Nikkei newspaper about the influence of weak yen on the Japanese economy. 

MS. GOPINATH: So I want to just step back a little bit on this in terms of the strength of the yen or its weakness I think we should, we see a very strong case for, you know, for Japan maintaining its flexible exchange rates which is what it's committed to and what it has been committed to for a long time. These kind of flexible exchange rates are very helpful to shield economies against shocks and so I think that is the first important message I want to send in terms of exchange rates. In terms of what the implications are of the yen weakening on the economy, we see of course a few channels. One is exporting firms make larger profits when you have yen depreciation and that is, that does help them with their investments because the profits the larger profits that they make provides them the funds that they need to kind of to make investments and that's very helpful. We also see the effect on tourism coming into Japan. The yen weakness encourages tourism and that also has a beneficial effect on the other hand of course there is the effect that comes through higher prices of some of imported goods when we evaluate the pass-through of the exchange rate to the overall level of inflation. We see that to be quite mild now that said of course there are some categories where you can see some more larger effects and households that are income constrained, can obviously feel, you know the consequences of higher, some of these higher prices coming from a weaker yen. But overall, we again recognize that the huge, the big benefits to Japan of its commitment to having a flexible exchange rate policy. 

MS. ELNAGAR: Thank you Gita. Any other questions? I know Mr. Anthony Rowley from South China Morning Post has a question if you can go on camera or I can read your question. We can't hear you. Can't hear you still. Can we check the technical? I can read it Anthony if that is okay. Can you talk now? No, okay I'll read that question and then you can submit other one if you want by text. So, Anthony is asking about our views on the short-term outlook for Japan and China and Japan-Korea relations. 

MS. GOPINATH: So the short -term outlook for  Japan as I mentioned earlier is we have growth projected to increase to 1 .1 percent this year. In terms of its relations with China and South Korea. Of course, China is its number two trading partner and Korea is its number three trading partner. Therefore if there's any developments in terms of growth in those two countries, we will have implications for Japan in fact for 2024, one of the reasons why growth was weaker is because of a decline in exports going to China  because of slowing growth in China so you could see the effect of that. And if she would like to add anything on these interrelations. 

MS. CHOUEIRI: Just to say that going forward, at least in the near term, we are seeing an improvement in the export outlook of Japan. We are seeing a recovery from the supply shocks that have happened because of the stoppage in the car production and drop in car exports. So overall, the outlook for exports in Japan for 2025 is improving. 

MS. ELNAGAR: Any other questions? Do you have any last word to say Gita for the group about the Japanese economy and an overview? 

MS. GOPINATH: I think we are all good unless you want to say anything.

MS. CHOUEIRI: I have nothing to add I think you said it all. 

MS. ELNAGAR: I think we have come to the end of our press conference. Thank you for attending and we're going to see you soon.

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