{
  "title": "Japan: Staff Concluding Statement of the 2018 Article IV Mission",
  "publication": "IMF News, October 4, 2018",
  "sourceUrl": "https://www.imf.org/en/news/articles/2018/09/28/ms100418-japan-article-iv-mission-concluding-statement",
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  "summary": "Real GDP growth projected at 1.1 percent in 2018, above estimated potential; headline and core inflation remain well below Bank of Japan’s 2 percent target.",
  "publishDate": "2018-10-04",
  "sections": [
    {
      "heading": "Recent economic developments and policies",
      "content": "- Real GDP growth projected at 1.1 percent in 2018, above estimated potential; headline and core inflation remain well below Bank of Japan’s 2 percent target.\n- Domestic demand recovered in Q2 2018 after a temporary soft patch earlier in the year; external demand expected to remain supportive.\n- External account:\n  - Current account (CA) surplus was 4.0 percent of GDP in 2017 and is expected to shrink to 3.6 percent of GDP in 2018.\n  - The sizable income surplus—about 90 percent of the CA surplus in 2017—reflects Japan’s large net foreign asset (NFA) position and high net returns.\n  - The 2018 current account balance and the 2018 real exchange rate are preliminarily assessed as broadly consistent with medium-term fundamentals and desirable policies.\n- Fiscal framework:\n  - The “New Plan to Advance Economic and Fiscal Revitalization” (announced June) postponed the primary surplus target from FY2020 to FY2025.\n  - The framework relies on relatively optimistic GDP and productivity assumptions and lacks a long-term plan to address increasing social security expenditures and ensure debt sustainability.\n  - The government reaffirmed commitment to the October 2019 two-percentage point consumption tax rate increase; mitigating measures are yet to be specified.\n- Structural reform progress:\n  - Recent labor market legislation passed by the Diet; effectiveness depends on implementation (including equal-pay for equal-work guidelines).\n  - Female and older-worker participation rising; foreign labor is increasing.\n  - Slow progress on eliminating disincentives to regular work from tax and social security systems; deregulation progress remains limited in some areas.\n  - Revisions/guidelines for the corporate governance code completed; trade reforms accelerated (Japan-EU agreement and CPTPP).\n- Monetary and financial developments:\n  - Bank of Japan (BoJ) has pursued Yield Curve Control (YCC) since September 2016 and adopted a more patient approach to the inflation target.\n  - Reduced reliance on JGB purchases has stabilized bond yields; July monetary policy meeting introduced greater flexibility in long-term yields and forward guidance on interest rates.\n  - Prolonged low interest rates and demographic change are squeezing financial institutions’ profitability and encouraging search for yield, posing particular challenges for regional financial institutions."
    },
    {
      "heading": "Outlook and risks",
      "content": "- Outlook:\n  - Underlying growth expected to remain solid despite the scheduled consumption tax increase; consumption volatility likely without effective mitigating measures.\n  - The consumption tax increase’s adverse effects are expected to carry past 2019 and adversely affect consumption and overall growth in 2020.\n  - Over the medium term, growth is expected to converge to potential and the small negative output gap to close; following a consumption tax-induced spike in 2020, inflation will rise over the medium term but likely remain below the BoJ’s target.\n- Downside risks have increased; balance of risks shifted to the downside in line with the global outlook.\n- Near-term risks:\n  - Sharper-than-expected volatility in private consumption and investment from the planned 2019 consumption tax increase could undermine near-term growth and delay fiscal consolidation.\n  - Weaker global demand, trade or geopolitical tensions could trigger yen appreciation, equity market shocks, renewed deflationary risks, or a disorderly tightening of global financial conditions.\n  - A sharp fall in equity prices or spike in JGB yields could increase macro-financial risks; rising foreign currency funding costs could squeeze profitability of internationally-active financial institutions.\n- Medium-term risks:\n  - Continued domestic monetary accommodation alongside tightening elsewhere could encourage excessive risk taking by financial institutions—particularly regional banks.\n  - Failure of regional banks and life insurers to adapt business models to low interest rates and adverse demographics could threaten viability.\n  - Fiscal sustainability concerns and bond market stress could feed back adversely on the financial system and real economy."
    },
    {
      "heading": "Challenges and economic policy priorities",
      "content": "- Six years into Abenomics: accomplishments include unemployment at a 25-year low, fiscal deficit halved, higher employment and female labor participation, reduced deflationary risks, and corporate cash reserves at all-time highs.\n- Remaining challenges: inflation below BoJ’s 2 percent target, fiscal policies have yet to put public debt on a sustainable path, and stagnant household incomes.\n- Demographics: population projected to shrink by 25 percent over the next 40 years—depressing growth and productivity and magnifying fiscal challenges.\n- Policy prescription: the strategy of Abenomics remains appropriate but needs reinvigoration so the three arrows (monetary, fiscal, structural) are reinforced and mutually supportive."
    },
    {
      "heading": "Fiscal policy (recommendations and specifics)",
      "content": "- Near-term stance:\n  - Avoid near-term fiscal tightening; maintain a neutral fiscal stance in 2019 and 2020 to support the planned consumption tax hike and BoJ reflation efforts.\n  - Implement measures to support reflation and growth momentum while advancing structural reforms.\n- Mitigating the 2019 consumption tax increase:\n  - Design temporary mitigating measures to alleviate adverse consumption impacts from the October 2019 tax increase, especially for durable goods like automobiles and housing.\n  - Provide clear communication on timing and content to reduce uncertainty.\n- Income and administered prices:\n  - Strengthen corporate tax incentives for wage increases.\n  - Raise minimum wages further.\n  - Increase administratively-controlled wages and social transfers to reflect consumption tax impact.\n  - Consider reforming price-setting of administered prices to better reflect costs, with safeguards for low-income households.\n- Medium- and long-term fiscal framework:\n  - Establish a well-specified medium-term fiscal framework relying on independent and realistic assessments, specifying consolidation measures, and limiting supplementary budgets; an independent fiscal institution could be important.\n  - Medium-term consolidation recommendation: annual consolidation of about 0.5 percent of GDP in the structural primary balance, starting from 2021.\n  - Gradual and steady increases in the consumption tax rate beyond 10 percent, with consolidation centered on increases until the rate reaches at least 15 percent; maintain a unitary rate structure as the rate moves beyond 10 percent.\n  - Reform healthcare to contain total spending with a focus on efficiency; consider increasing out-of-pocket shares with safeguards for low-income households.\n  - Address income inequality: protect disadvantaged elderly groups when curbing social security outlays; fiscal policy should support opportunities for women and eliminate disincentives to full-time and regular work in tax and social security systems."
    },
    {
      "heading": "Structural reforms (recommendations and potential impact)",
      "content": "- Overall:\n  - Reinvigorated reforms to boost productivity, labor supply, and investment are critical; credible implementation, combined with accommodative monetary policy and public debt stabilization, could boost real GDP by as much as 15 percent over 40 years.\n- Labor market reforms (largest impact):\n  - Provide training and career opportunities to non-regular workers, including via contract reform, to raise productivity and real wages.\n  - Complement equal-pay for equal-work legislation with detailed job descriptions and a stronger reporting framework.\n  - Increase labor participation by women, older workers, and foreign workers by eliminating tax and social security disincentives, expanding childcare and nursing facilities, and reducing the gender wage gap.\n  - Reduce excessive overtime, encourage managerial practices that reward productivity, and consider abolishing firms’ right to set a mandatory retirement age.\n- Product market and corporate reforms:\n  - Facilitate exit of non-viable SMEs and entry of higher-potential firms; reduce coverage of the credit guarantee system; incentivize alternative SME financing; support SME R&D and business succession for high-growth firms.\n  - Continue deregulation to lower barriers to entry and remove incumbent protections in some industries (telecom and gas), deregulate professional services, and expedite deregulation in economic zones.\n  - Deepen corporate governance reform to deploy cash reserves and boost investment; promote broader adoption of automation and AI.\n- Trade liberalization and FDI:\n  - Further removal of tariff and non-tariff barriers within multilateral trade agreements would boost investment and growth."
    },
    {
      "heading": "Monetary and financial policies (recommendations)",
      "content": "- Bank of Japan:\n  - Maintain long-term interest rate target while strengthening inflation expectations and policy credibility.\n  - Clarify relationship between forward guidance on long-term interest rate target and the inflation target.\n  - Remove quantitative guidance on JGB purchases.\n  - Consider moving closer to a full-fledged inflation targeting framework by publishing BoJ’s staff baseline forecast together with underlying policy assumptions to strengthen communication and credibility.\n- Financial sector resilience:\n  - Japanese Financial Services Agency (JFSA) should enhance financial oversight, including macroprudential framework strengthening, to prevent systemic risk build-up.\n  - Encourage financial institutions, particularly regional ones, to improve risk management and adapt business models to demographic trends via revenue diversification, IT and Fintech utilization, and consolidation.\n  - Strengthen crisis management and resolution frameworks to reduce public support expectations and facilitate orderly exits of unviable institutions.\n  - Facilitate Fintech uptake to reduce costs and improve efficiency; increase cybersecurity for Fintech firms (including crypto-asset exchanges) and regional financial institutions.\n  - JFSA needs adequate human and IT resources and should promote use of RegTech; enhance cross-border supervisory collaboration to prevent regulatory arbitrage."
    },
    {
      "heading": "Spillovers and resilience",
      "content": "- External spillovers:\n  - Continued multilateralism and bolder domestic policies are needed to mitigate inward spillovers, including from trade-war escalation.\n  - A global retreat from cross-border integration would likely reduce Japan’s net exports, investment, and growth—channels include global value chains and financial sector spillovers; cars and car parts trade would be particularly significant.\n  - Japan’s leadership in multilateralism can help mitigate trade-war effects.\n  - Alternatively, credible structural reforms and medium-term fiscal consolidation supporting growth and domestic demand would mitigate inward spillovers that could otherwise increase external imbalances.\n- Outward spillovers:\n  - Rising global interest rates amid Japan’s accommodative policy could amplify outward spillovers.\n  - Speculation over early policy normalization in Japan could rattle bond markets and increase volatility.\n  - Growing differentials between global and domestic interest rates could encourage unhedged yen carry trade; a sharp reversal could cause large yen appreciation and hurt BoJ’s reflation efforts."
    },
    {
      "heading": "Closing",
      "content": "- The IMF team thanks authorities and interlocutors in Tokyo, Sendai and Osaka for hospitality and discussions.\n\nJapan: Staff Concluding Statement of the 2018 Article IV Mission\n\n---\n\n\n References\n\n- Transcript: Press Conference on the Conclusion of the Mission for the 2018 Article IV Consultation with Japan\n- Japan and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2018/09/28/ms100418-japan-article-iv-mission-concluding-statement"
    }
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    "Published: October 4, 2018",
    "Real GDP growth projected at 1.1 percent in 2018, above estimated potential; headline and core inflation remain well below Bank of Japan’s 2 percent target.",
    "Domestic demand recovered in Q2 2018 after a temporary soft patch earlier in the year; external demand expected to remain supportive.",
    "External account:",
    "Fiscal framework:",
    "Structural reform progress:",
    "Monetary and financial developments:",
    "Outlook:",
    "Downside risks have increased; balance of risks shifted to the downside in line with the global outlook.",
    "Near-term risks:",
    "Medium-term risks:",
    "Six years into Abenomics: accomplishments include unemployment at a 25-year low, fiscal deficit halved, higher employment and female labor participation, reduced deflationary risks, and corporate cash reserves at all-time highs.",
    "Remaining challenges: inflation below BoJ’s 2 percent target, fiscal policies have yet to put public debt on a sustainable path, and stagnant household incomes.",
    "Demographics: population projected to shrink by 25 percent over the next 40 years—depressing growth and productivity and magnifying fiscal challenges.",
    "Policy prescription: the strategy of Abenomics remains appropriate but needs reinvigoration so the three arrows (monetary, fiscal, structural) are reinforced and mutually supportive.",
    "Near-term stance:",
    "Mitigating the 2019 consumption tax increase:",
    "Income and administered prices:",
    "Medium- and long-term fiscal framework:",
    "Overall:",
    "Labor market reforms (largest impact):",
    "Product market and corporate reforms:",
    "Trade liberalization and FDI:",
    "Bank of Japan:",
    "Financial sector resilience:",
    "External spillovers:",
    "Outward spillovers:",
    "The IMF team thanks authorities and interlocutors in Tokyo, Sendai and Osaka for hospitality and discussions.",
    "[Transcript: Press Conference on the Conclusion of the Mission for the 2018 Article IV Consultation with Japan](https://www.imf.org/en/News/Articles/2018/10/04/tr100418-transcript-md-presser-2018-japan-a4)",
    "[Japan and the IMF](http://www.imf.org/external/country/JPN/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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