How to Reload Abenomics
IMF News, August 2, 2016
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- Published: August 2, 2016
Overview and challenge
- Japan needs a sizeable policy upgrade to meet the country’s ambitious package of economic policies to tackle two decades of mild deflation and weak growth.
- After initial success of Abenomics—the three “arrows” of monetary stimulus, fiscal “flexibility” and structural reform—the economy’s momentum is flagging and deflation risks are on the rise.
- Contributing factors to weak momentum:
- The yen has appreciated substantially since 2015, damping exports.
- Global trade slowdown has reduced external demand.
- Positive effects from the commodity price decline have not fed through to the economy.
- Policy uncertainty and stock market volatility have hampered domestic confidence and demand.
- A shrinking and aging population are weighing on growth and investment opportunities.
Key macroeconomic findings and statistics
- Growth projections:
- Growth is expected at 0.3 percent in 2016.
- Growth is expected at 0.1 percent in 2017.
- Inflation projections:
- Headline inflation would rise from 0.2 percent in 2016 to 0.4 percent in 2017.
- Labor market:
- Unemployment rate at 3.1 percent in June 2016.
- Base wage growth at 0.4 percent in 2016.
- Fiscal and balance-sheet constraints:
- Budget deficit at about 5 percent of GDP in 2016.
- The Bank of Japan’s balance sheet is one of the largest among advanced economies.
- Policy interest rates dipping into negative territory.
- Abenomics targets currently out of reach under current policies:
- Consumer price inflation at 2 percent.
- Real GDP growth at 2 percent.
- A primary budget balance by 2020.
Policy diagnosis
- Limited room remains for traditional monetary and fiscal stimulus given high gross and net public debt and other balance-sheet constraints.
- To revive inflation and growth, the IMF emphasizes the need for bolder reforms and a coordinated policy mix focused on income policies, labor market reforms, and fiscal consolidation.
Recommended policy actions
- Reload with income policies to spur firms to raise wages:
- Use mechanisms to induce private enterprises to raise wages, such as mimicking the “comply or explain” mechanism used for corporate governance reform.
- Expand tax incentives (or introduce penalties as a last resort).
- Raise administratively controlled wages and prices in line with the inflation target.
- Continue the already adopted decision to increase minimum wage growth by 3 percent per year.
- Implement labor market reforms to remove duality:
- Promote new hiring under contracts that better balance job security and wage increases.
- Accelerate the “equal-pay for equal work” program.
- Eliminate impediments to full-time or regular work through tax and social security reform.
- Increase available child care facilities.
- Encourage more foreign workers into the country.
- Provide sustained and balanced fiscal and monetary support for demand to facilitate pass-through of higher wages to prices and to prevent structural reforms from creating deflationary pressures.
- Renewed focus on fiscal policy and sustainability:
- Adopt a gradual but steady path of consumption tax increases, starting as soon as possible.
- Implement an explicit expenditure rule to contain social security spending growth.
- Strengthen fiscal institutions, including more independent macro-fiscal forecasts to ensure budget projections are built on realistic macroeconomic assumptions.
- Enhance monetary policy effectiveness and credibility:
- Raise inflation expectations through clearer communication and better use of forward guidance.
- Safeguard financial stability:
- Enhance monitoring of bank profitability and JGB market liquidity.
- Bolster resilience of regional banks through further regulatory reforms.
Japan’s top five priorities (as outlined)
- Implement more ambitious structural reforms, particularly in the labor market to reduce duality and encourage the participation of women, older workers and foreign professionals.
- Add stronger income policies to the policy mix targeted at enhancing wage-price dynamics, facilitated by sustained and balanced fiscal and monetary demand support.
- Commit to a credible fiscal consolidation plan, with a pre-announced path of steady consumption tax hikes; broaden the tax base; reform the social security system; and strengthen the fiscal framework to enhance policy credibility.
- Enhance the effectiveness and credibility of monetary policy; raise inflation expectations through clearer communication and better use of forward guidance.
- Safeguard financial stability, including by enhancing the monitoring of bank profitability and JGB market liquidity, and bolstering resilience of regional banks through further regulatory reforms.
How to Reload Abenomics — IMF Country Focus, August 2, 2016.