## How to Reload Abenomics _IMF News, August 2, 2016_ ## Source details **Canonical URL:** [How to Reload Abenomics](https://www.imf.org/en/news/articles/2016/08/02/13/00/na080216-how-to-reload-abenomics) ## Other formats - [Markdown version](/en/news/articles/2016/08/02/13/00/na080216-how-to-reload-abenomics/index.md) - [Structured JSON version](/en/news/articles/2016/08/02/13/00/na080216-how-to-reload-abenomics/index.json) - [Bundle manifest](/en/news/articles/2016/08/02/13/00/na080216-how-to-reload-abenomics/bundle-manifest.json) ## Bibliographic details - 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.* --- ## References - [https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus) - [PRESS CENTER](http://presscenter.imf.org/) - [IMF Country Focus](https://www.imf.org/en/news/country-focus) - [Press Release](http://www.imf.org/en/News/Articles/2016/08/02/12/14/PR16372-Japan-IMF-Executive-Board-Concludes-2016-Article-IV-Consultation) - [Staff Report](http://www.imf.org/external/pubs/cat/longres.aspx?sk=44158.0) - [Selected Issues](http://www.imf.org/external/pubs/cat/longres.aspx?sk=44159.0) - [Japan and the IMF](http://www.imf.org/external/country/jpn/) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2016/08/02/13/00/na080216-how-to-reload-abenomics_