IMF Survey : Japan: Concrete Fiscal, Growth Measures Can Help Exit Deflation

IMF News, August 5, 2013

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Canonical URL: IMF Survey : Japan: Concrete Fiscal, Growth Measures Can Help Exit Deflation

The “three arrows” of Abenomics (aggressive monetary easing, more flexible fiscal policies, and structural reforms) provide a unique opportunity to exit deflation and revive growth.
The Bank of Japan’s Quantitative and Qualitative Monetary Easing is taking the lead in ending deflation.
IMF economists stress the need to launch the second and third arrows—credible medium-term fiscal and growth plans—to secure a sustained recovery and to bring down public debt.

The unprecedented monetary easing contributed to a pickup in demand and growth accelerated sharply in early 2013.
Wealth effects from rising equity values stimulated consumption; strong regional demand and a weaker yen resulted in an export rebound.
Private investment has yet to pick up, but industrial production and retail sales are improving.
Inflation expectations have increased and headline inflation is slowly rising.
IMF projection: growth to reach 2 percent in 2013.
IMF projection: inflation to gradually increase to 0.7 percent by the end of the year.

External risks:
- A slowdown in emerging markets, especially in China, or a protracted period of slower growth in Europe could reduce demand for Japanese exports and lower growth below IMF projections.
Domestic risks:
- The most significant domestic risk is the lack of credible fiscal consolidation and structural reform plans.
- “Without concrete measures, the new macroeconomic framework lacks credibility and may fail to raise growth and inflation expectations.”
- Risk that monetary policy becomes overburdened and the rest of the world could be negatively affected through a weaker yen.
- Worst-case scenario: given Japan’s high public debt, the lack of a convincing debt reduction strategy could result in a shift in market perceptions and a self-fulfilling sell-off of government bonds.

To place the public debt-to-GDP ratio on a downward path, IMF economists estimate that a fiscal consolidation of 11 percent over the next decade is required.
Implementing the planned increase of the consumption tax rate from 5 to 10 percent by 2015 is a necessary first step.
Substantial additional consolidation measures to take effect after 2015 will also be necessary.
Suggested medium-term, growth-friendly measures include:
- A further increase of the consumption tax rate to at least 15 percent.
- Broadening the personal income tax base to raise revenue and improve incentives to work.
- Containing pension and health spending.

The government’s new growth strategy includes several ambitious goals, but specific measures remain to be formulated.
Trade negotiations:
- Negotiations over Japan’s participation in the Trans-Pacific Partnership are a welcome step.
Labor market and social policies:
- Structural reforms should include measures to raise female labor participation.
- Welcomed government plans to eliminate waiting lists on kindergartens and day-care centers to support women’s employment.
- “Raising the employment of women would give an important signal about the government’s commitment to reforms.”
Other recommended reforms:
- Reduce excessive labor market duality.
- Deregulation in the agriculture and service sectors.
- Financial sector reforms to achieve a more efficient allocation of credit.
- Relaxation of immigration requirements to address labor shortages.

Adoption of concrete fiscal and structural reform measures would strongly mitigate risks and greatly improve the chances for Japan to end deflation and revive growth.
Reviving growth and ending deflation would be beneficial not only for Japan but also for the rest of the world.
“All three arrows should be launched for the policies to succeed and benefit the global economy.”

Source: IMF Survey, August 5, 2013.