Japan: IMF Executive Board Concludes 2016 Article IV Consultation
IMF News, August 2, 2016
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- Published: August 2, 2016
Economic outlook and near-term assessment
- Economic growth has slowed due to weak private consumption and sluggish investment; inflation has lost its forward momentum.
- Financial conditions remain accommodative, but falling stock prices and the appreciation of the yen have resulted in a modest tightening.
- Authorities' policy responses include the adoption of the negative interest rate policy, plans for additional fiscal stimulus, and the postponement of the scheduled 2017 consumption tax hike by two and a half years.
- Outlook and staff projections:
- Economy expected to expand at about 0.3 percent in 2016.
- Economy expected to expand at 0.1 percent in 2017, excluding the possible effect of the yet to be adopted economic stimulus package.
- Over the medium term growth is projected to be in line with potential (which is on a declining trend).
- Inflation is expected to rise to about 1 percent.
- Downside risks dominate in the medium term, including:
- Weak external and domestic demand.
- Uncertainty about the sustainability of low interest rates in a high public debt environment.
- Financial stability risks in the context of unprecedented monetary easing.
Executive Board assessment and findings
- Directors welcomed the initial success of Abenomics and forceful policy implementation to lift growth and inflation, but noted continued subdued growth and persistent deflationary pressures.
- Key headwinds and structural impediments identified:
- Weak consumption, lackluster private investment, and sluggish exports.
- Strong headwinds from a weak global recovery, appreciation and volatility of the exchange rate, and adverse demographics.
- Low confidence in economic growth prospects holding back investment and credit demand.
- Labor market duality and inflexibility hampering wage growth.
- Limited financial sector support for risk-taking.
- Stop-go nature of fiscal policy and optimistic growth assumptions undermining fiscal credibility.
- Weak monetary transmission, sluggish wage-price dynamics, and a falling natural rate of interest impeding inflation expectations.
- External considerations:
- Sluggish global growth and overcapacity in traded goods sector limited the export response to a weaker yen.
- Declining commodity prices put downward pressure on headline inflation and delayed the Bank of Japan’s timeline to hit the inflation target.
- Yen appreciation earlier in the year moved Japan’s external position toward a level broadly consistent with fundamentals but could make reflation more challenging.
Policy recommendations and required reforms
- Structural reforms (essential for a reloaded Abenomics):
- Raise productivity, labor supply, and potential growth.
- Labor market reforms to reduce duality and increase labor force participation by female, older, and foreign workers.
- Consider options to strengthen incentives for companies to raise wages and promote flexible labor contracts.
- Welcome decision to lift minimum wage growth.
- Macroeconomic policy mix:
- Complement structural reforms with fiscal and monetary demand support, balancing short-term growth with fiscal sustainability and financial stability.
- Without a full policy upgrade, macroeconomic policies may need recalibration—implying larger fiscal consolidation needs and a looser monetary policy over a longer period.
- Fiscal policy and institutions:
- Chart a credible course for fiscal consolidation to place debt on a downward trajectory, reduce policy uncertainty, and create near-term fiscal space.
- Broad agreement that a pre-announced path for gradual but sustained increase in the consumption tax, insofar as administratively feasible, would mitigate negative impacts and enhance credibility.
- Recommend containing social security spending growth and broadening the tax base.
- Encourage adoption of spending rules and an independent assessment of the outlook and budget projections.
- Monetary policy and communication:
- Emphasize need for clear, effective communication around monetary policy and better use of forward guidance.
- Financial sector and macroprudential measures:
- Continue to strengthen the macroprudential policy toolkit.
- Enhance monitoring of liquidity in the government bond market, financial institutions’ profitability, and foreign exchange risks.
- Continue efforts to improve the resilience of regional banks and inter-agency coordination.
Key statistics and indicators (selected; as reported)
- Nominal GDP: US$ 4,124 Billion (2015)
- Population: 127 Million (2015)
- GDP per capita: US$ 32,480 (2015)
- Quota: SDR 15.6 Billion (2015)
- Real GDP growth (percent change) 1/:
- 2011: -0.5
- 2012: 1.7
- 2013: 1.4
- 2014: 0.0
- 2015: 0.5
- 2016 (Proj.): 0.3
- 2017 (Proj.): 0.1
- Output Gap:
- 2011: -3.3
- 2012: -2.0
- 2013: -1.1
- 2014: -1.5
- 2015: -1.7
- Inflation (annual average, CPI and measures noted in source):
- Core CPI excluding VAT and Core measures cited; CPI effects include consumption tax increases in 2014 and 2015.
- Inflation expected to rise to about 1 percent (medium term).
- Unemployment rate (annual average):
- 2011: 4.6
- 2012: 4.0
- 2013: 3.4
- 2014: 3.3
- General government (percent of GDP):
- Revenue (2015): 34.1
- Expenditure (2015): 38.3
- Overall Balance:
- 2011: -9.8
- 2012: -8.8
- 2013: -8.6
- 2014: -6.2
- 2015: -5.2
- 2016: -5.1
- 2017: -4.3
- Primary balance:
- 2015: -4.9
- 2016: -4.5
- 2017: -4.3
- Structural primary balance examples provided in table (series values shown).
- Public debt, gross:
- 2011: 231.6
- 2012: 238.0
- 2013: 244.5
- 2014: 249.1
- 2015: 248.0
- 2016: 250.7
- 2017: 254.0
- Macro-financial indicators:
- Base money (percent change, end-period):
- 2011: 22.2
- 2012: 19.3
- 2013: 60.3
- 2014: 36.7
- 2015: 29.1
- 2016: 22.6
- 2017: 18.3
- Non-financial corporate debt in percent of GDP:
- 2011: 191.3
- 2012: 196.3
- 2013: 225.6
- 2014: 238.2
- 2015: 234.4
- 2016: 234.0
- 2017: 236.1
- Household debt in percent of disposable income:
- 2011: 128.3
- 2012: 127.1
- 2013: 128.5
- 2014: 129.3
- 2015: 130.3
- 2016: 131.8
- Balance of payments (in billions of US$):
- Current account balance:
- 2011: 129.8
- 2012: 59.7
- 2013: 45.9
- 2014: 36.4
- 2015: 135.6
- 2016: 159.4
- 2017: 143.2
- Percent of GDP examples shown in table.
- Exports of goods, f.o.b. (selected years):
- 2011: 790.8
- 2012: 776.0
- 2013: 695.0
- 2014: 699.4
- 2015: 621.9
- 2016: 620.5
- 2017: 643.0
- Imports of goods, f.o.b. (selected years):
- 2011: 795.3
- 2012: 829.9
- 2013: 784.9
- 2014: 799.3
- 2015: 627.2
- 2016: 601.2
- 2017: 642.3
- Energy imports:
- 2011: 242.8
- 2012: 272.2
- 2013: 257.4
- 2014: 241.7
- 2015: 133.7
- 2016: 112.6
- Exchange rates (annual average):
- Yen/dollar rate:
- 2011: 79.8
- 2012: 97.6
- 2013: 105.9
- 2014: 121.0
- 2015: 106.9
- 2016: 101.1
- 2017: (table lists 2017 value where applicable)
- Real effective exchange rate (ULC-based; 2005=100):
- 2011: 118.5
- 2012: 119.7
- 2013: 96.7
- 2014: 88.8
- 2015: 85.0
- Demographic indicators:
- Old-age dependency examples reported (series values shown in table).
Source: Press Release No. 16/372 — Japan: IMF Executive Board Concludes 2016 Article IV Consultation (August 2, 2016).