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IMF Executive Board Concludes 2017 Article IV Consultation with Japan
July 31, 2017
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Keiko Utsunomiya
Phone: +1 202 623-7100Email: MEDIA@IMF.org
On July 26, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Japan.
Japan’s economy is growing above potential, narrowing the negative output gap. The expansion is now broader and more balanced than in 2015, with private consumption growth turning positive and private investment strengthening on the back of residential investment. However, labor shortages are evident, wage growth remains weak, and inflation is stubbornly low.
Net exports picked up in the second half of 2016 as global demand rebounded and imports fell, driven by lower energy costs. The current account balance, while dominated by the income account, strengthened accordingly, while the real effective exchange rate appreciated substantially between 2015 and 2016 moving it to a level consistent with medium-term fundamentals.
Growth momentum will carry through 2017 but would weaken in 2018 if fiscal support fades as currently scheduled. The fiscal stimulus package supports 2017 growth through higher consumption and investment. Monetary policy is expected to remain accommodative and facilitate a virtuous cycle between credit and economic growth. However, the possible expiration of fiscal support in 2018, together with a smaller expansion in foreign demand would reduce the rate of growth, despite an anticipated Olympics-related boost in private investment.
An aging and shrinking population is likely to reduce the role of banks in financial intermediation, posing a particular challenge for regional and Shinkin banks. Financial sector stability and long-term challenges were analyzed during the IMF’s Financial Sector Assessment Program (FSAP). The FSAP’s findings are summarized in the accompanying Financial System Stability Assessment (FSSA).
Executive Board Assessment[2]
Executive Directors broadly agreed with the thrust of the staff appraisal. They welcomed the improvement in Japan’s economic performance. However, they noted that recent growth is rooted primarily in favorable external conditions and fiscal support, and could be temporary. Moreover, domestic consumption and investment growth remain modest, wages and incomes have yet to rise adequately, inflation remains below target, and the low interest rate environment and demographic headwinds pose risks to the financial sector. With this background, Directors stressed that the current favorable environment provides an opportunity to push ahead with a comprehensive and coordinated reform package to help sustain growth, raise inflation, and address medium term challenges, including fiscal consolidation and an increase in potential growth.
Directors considered structural reforms as an essential element of putting Japan on a path toward reaching its ambitious objectives. The focus should first be on measures to strengthen productivity and wage pressures by reducing labor market duality and increasing mobility. This should be followed by reforms to bolster investment as well as diversifying and enhancing labor supply to raise potential growth. To this end, full-time work, female and older labor market participation, and use of foreign labor should be facilitated. These reforms should be complemented by income policies, including stronger incentives for profitable firms to raise wages.
Directors emphasized that sustained accommodative monetary policy remains warranted. They welcomed the policy upgrade signaled by the yield curve control framework and the Bank of Japan’s commitment to overshoot the inflation target.
Directors underscored the need for medium-term fiscal consolidation to address risks from the high level of public debt, reduce policy uncertainty, and anchor policy-making. In this context, they broadly supported a pre-announced path for a gradual and sustained increase in the consumption tax, although a few Directors pointed to implementation risks. Directors also recommended containing social security spending and broadening the tax base. Many Directors supported the need for short-term fiscal support to the economy, although a number of others emphasized the urgency of fiscal consolidation.
Directors noted that the substantial real effective exchange rate appreciation in 2016 had moved the yen to a level consistent with fundamentals. A coordinated policy package, with a strong structural reform element, can help bring the moderately strong external position in line with fundamentals over the medium term and mitigate inward spillovers from any rise in protectionism. Many Directors called for refining the analytical basis of this assessment of the external position.
Directors encouraged the authorities to strengthen financial sector oversight, along the lines of the Financial Sector Assessment Program recommendations. These efforts need to include moving toward full risk-based prudential supervision, strengthening corporate governance across the banking and insurance sectors, tailoring capital requirements to the banks’ risk profiles, and implementing a more robust framework for regulation of the insurance sector. Directors welcomed efforts to improve the macroprudential framework, and a few Directors emphasized the need to clarify the mandate of the Council for Cooperation on Financial Stability and to proactively expand the macroprudential toolkit.
Directors stressed the need for continued engagement with financial institutions on the implications of macroeconomic and demographic trends, and timely action when viability concerns are identified. They also stressed the need to strengthen the crisis management and resolution framework to limit expectations of public support. Directors highlighted the need for regional banks to consider augmented fee-based income, cost reduction, and consolidation.
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Japan: Selected Economic Indicators, 2012–18 |
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Nominal GDP: US$ 4,941 Billion (2016) |
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Population: 127 Million (2016) |
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GDP per capita: US$ 38,937 (2016) |
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Quota: SDR 30.8 billion (2016) |
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2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
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Proj. |
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Growth (percent change) 1/ |
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Real GDP |
1.5 |
2.0 |
0.3 |
1.1 |
1.0 |
1.3 |
0.6 |
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Domestic demand |
2.3 |
2.4 |
0.4 |
0.7 |
0.4 |
0.7 |
0.7 |
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Private consumption |
2.0 |
2.4 |
-0.9 |
-0.4 |
0.4 |
0.8 |
0.7 |
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Business investment |
4.1 |
3.7 |
5.2 |
1.1 |
1.3 |
3.0 |
3.3 |
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Residential investment |
2.5 |
8.0 |
-4.3 |
-1.6 |
5.6 |
3.1 |
2.4 |
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Government consumption |
1.7 |
1.5 |
0.5 |
1.7 |
1.3 |
0.7 |
-0.2 |
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Public investment |
2.7 |
6.7 |
0.7 |
-2.1 |
-3.0 |
-0.2 |
-4.4 |
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Stockbuilding 2/ |
0.0 |
-0.4 |
0.1 |
0.6 |
-0.3 |
-0.4 |
-0.1 |
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Net exports 2/ |
-0.8 |
-0.4 |
0.0 |
0.3 |
0.6 |
0.5 |
-0.1 |
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Exports of goods and services 3/ |
-0.1 |
0.8 |
9.3 |
2.9 |
1.2 |
6.3 |
2.4 |
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Imports of goods and services 3/ |
5.4 |
3.3 |
8.3 |
0.8 |
-2.3 |
3.0 |
2.7 |
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Output Gap |
-3.6 |
-2.2 |
-2.6 |
-2.1 |
-1.8 |
-1.1 |
-0.9 |
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Inflation (annual average) |
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CPI 4/ |
-0.1 |
0.3 |
2.8 |
0.8 |
-0.1 |
0.7 |
0.6 |
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CPI excluding VAT |
-0.1 |
0.3 |
1.2 |
0.3 |
-0.1 |
0.7 |
0.6 |
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Core Core CPI excluding VAT 5/ |
-0.4 |
-0.2 |
0.7 |
0.9 |
0.6 |
… |
… |
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GDP deflator |
-0.8 |
-0.3 |
1.7 |
2.1 |
0.3 |
-0.1 |
0.9 |
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Unemployment rate (annual average) |
4.3 |
4.0 |
3.6 |
3.4 |
3.1 |
3.1 |
3.1 |
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Government (percent of GDP) |
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General government |
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Revenue |
30.4 |
31.2 |
32.7 |
33.2 |
32.6 |
32.6 |
32.4 |
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Expenditure |
38.7 |
38.9 |
38.0 |
36.7 |
36.8 |
36.7 |
35.7 |
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Overall Balance |
-8.3 |
-7.6 |
-5.4 |
-3.5 |
-4.2 |
-4.1 |
-3.3 |
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Primary balance |
-7.5 |
-7.0 |
-4.9 |
-3.1 |
-4.0 |
-4.0 |
-3.3 |
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Structural primary balance |
-6.3 |
-6.4 |
-4.6 |
-3.5 |
-3.6 |
-3.7 |
-3.1 |
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Public debt, gross |
236.6 |
240.5 |
242.1 |
238.2 |
239.4 |
240.7 |
240.3 |
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Macro-financial (percent change, end-period, unless otherwise specified) |
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Base money |
19.3 |
60.3 |
36.7 |
29.1 |
17.9 |
16.7 |
14.5 |
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Broad money |
2.8 |
4.0 |
3.0 |
3.0 |
3.4 |
3.1 |
2.7 |
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Credit to the private sector |
3.1 |
5.5 |
1.5 |
2.1 |
2.7 |
2.6 |
2.6 |
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Non-financial corporate debt in percent of GDP |
134.3 |
134.7 |
135.7 |
131.7 |
133.4 |
134.9 |
136.2 |
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Household debt in percent of disposable income |
119.7 |
121.9 |
124.2 |
126.4 |
129.6 |
130.0 |
131.1 |
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Interest rate |
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Overnight call rate, uncollateralized (end-period) |
0.1 |
0.1 |
0.1 |
0.0 |
-0.1 |
… |
… |
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Three-month CD rate (annual average) |
0.3 |
0.2 |
0.2 |
0.2 |
0.1 |
… |
… |
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Official discount rate (end-period) |
0.3 |
0.3 |
0.3 |
0.3 |
0.3 |
0.3 |
0.3 |
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10-year JGB yield (e.o.p.) |
0.9 |
0.7 |
0.6 |
0.4 |
0.0 |
0.1 |
0.2 |
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Balance of payments (in billions of US$) |
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Current account balance |
59.7 |
45.9 |
36.8 |
134.1 |
188.1 |
186.8 |
208.0 |
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Percent of GDP |
1.0 |
0.9 |
0.8 |
3.1 |
3.8 |
3.9 |
4.2 |
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Trade balance |
-53.9 |
-90.0 |
-99.9 |
-7.4 |
51.4 |
54.0 |
67.8 |
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Percent of GDP |
-0.9 |
-1.7 |
-2.1 |
-0.2 |
1.0 |
1.1 |
1.4 |
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Exports of goods, f.o.b. |
776.0 |
695.0 |
699.7 |
622.1 |
635.3 |
676.1 |
705.0 |
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Imports of goods, f.o.b. |
829.9 |
784.9 |
799.7 |
629.5 |
583.9 |
622.2 |
637.2 |
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Energy imports |
272.2 |
257.4 |
241.8 |
133.8 |
94.9 |
114.4 |
113.6 |
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FDI, net (percent of GDP) |
1.9 |
2.8 |
2.4 |
3.0 |
2.7 |
2.5 |
2.5 |
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Portfolio Investment, net (percent of GDP) |
0.5 |
-5.4 |
-0.9 |
3.0 |
5.7 |
4.1 |
3.8 |
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Terms of trade (percent change) |
-1.8 |
-2.5 |
-1.0 |
14.1 |
9.3 |
-17.2 |
3.6 |
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Change in reserves |
-37.9 |
38.7 |
8.5 |
5.1 |
-5.7 |
10.0 |
10.5 |
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Total reserves minus gold (in billions of US$) |
1227.2 |
1237.3 |
1231.0 |
1207.1 |
1188.4 |
… |
… |
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Exchange rates (annual average) |
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Yen/dollar rate |
79.8 |
97.6 |
105.9 |
121.0 |
108.8 |
112.2 |
110.8 |
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Yen/euro rate |
102.6 |
129.6 |
140.8 |
134.3 |
120.4 |
122.5 |
122.4 |
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Real effective exchange rate (ULC-based) 6/ |
118.6 |
95.9 |
86.8 |
83.6 |
93.6 |
… |
… |
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Real effective exchange rate (CPI-based) 7/ |
100.6 |
80.3 |
75.1 |
70.1 |
79.5 |
… |
… |
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Demographic Indicators |
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Population Growth |
-0.2 |
-0.2 |
-0.2 |
-0.1 |
-0.1 |
-0.3 |
-0.4 |
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Old-age dependancy |
37.8 |
39.8 |
41.8 |
43.5 |
44.9 |
46.2 |
47.2 |
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Sources: IMF, Competitiveness Indicators System; OECD, and IMF staff estimates and projections as of Jun 12, 2017. |
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1/ Annual growth rates and contributions are calculated from seasonally adjusted data. |
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2/ Contribution to GDP growth. |
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3/ For 2014 export and import growth rates are inflated because of changes in the compilation of BoP statistics (BPM6) implying a break in the series relative to previous years. |
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4/ Including the effects of consumption tax increases in 2014 and 2015. |
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5/ Bank of Japan Measures of Underlying Inflation; excluding fresh food & energy. |
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6/ Based on normalized unit labor costs; 2005=100. |
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7/ 2010=100. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
