Transcript of a Press Conference on the Conclusion of the Mission for the 2018 Article IV Consultation with Japan
IMF News, October 4, 2018
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- Published: October 4, 2018
Economic outlook and key projections
- Real GDP growth forecasts:
- 2018: 1.1 percent
- 2019: 0.9 percent
- Growth is "significantly above potential" in the near term.
- Inflation outlook:
- Inflation "likely to continue its slow upward trend" but "will remain below two percent in the next few years."
- Bank of Japan target: two percent.
- Fiscal and policy timing:
- A consumption tax increase of two points is scheduled in October 2019 and is expected to impact growth in 2020.
- Fiscal stance recommended to remain neutral "at least for the next two years."
- Demographics and long-term baseline:
- IMF assessment: the population and the size of the economy will "shrink by 25 percent over the next 40 years."
Assessment of policy framework and Abenomics
- Overall assessment:
- Six years into Abenomics: "a lot has been accomplished" under the three arrows.
- Achievements cited: risk of deflation receded; fiscal deficit significantly reduced; unemployment very low; "a significant number of women have joined the workforce."
- Remaining challenges:
- Inflation remains well below the BOJ target of two percent.
- Public debt "is not yet on a sustainable path."
- Household income remains stagnant.
- Low interest rate environment combined with aging population is squeezing profitability of financial institutions, increasing incentives to search for yield—risks "likely to persist" and "pose particular challenges for regional financial institutions."
- Recommendation on Abenomics:
- Abenomics needs a "fresh look," to be "revamped, accelerated, and...implemented as a package" so the three arrows mutually reinforce each other.
- Structural reform (the "third arrow") must be deep, credible, legislated, and implemented.
Fiscal policy recommendations
- Short-term:
- Fiscal policy should "protect growth" and be "growth-friendly."
- The 2019 tax increase should be accompanied by "carefully designed mitigating measures to protect near-term reflation and growth momentum."
- Fiscal stance advised to remain neutral "at least for the next two years."
- Medium- and long-term:
- The consumption tax increase should be followed by "further small, gradual increases."
- A "credible fiscal specific strategy" is needed to manage public debt and address age-related costs.
- Comment on timing and realism:
- IMF view: postponing the primary balance surplus target to 2025 is "more consistent with the reality of the growth forecast and of the proposed fiscal path" and reflects realism.
Monetary policy recommendations
- Support for BOJ approach:
- IMF "agree[s] with the Bank of Japan on its continued monetary accommodation" aimed at achieving the two percent inflation target.
- IMF "welcome[s] the BOJ initiative to make monetary policy sustainable."
- Communication:
- Clear communication by the BOJ is encouraged to better inform market participants.
Structural reforms and priorities
- Top priority: labor market reform
- Labor market reform can "unleash maximum effect" by enhancing worker productivity and enabling pass-through of demand stimulus to wages and prices—thereby feeding into inflation.
- Other structural priorities:
- Product market reform
- Corporate governance reform
- Trade liberalization (Japan already a leader)
- Implementation emphasis:
- Reforms must be deep, credible, legislated, and implemented to deliver full benefits.
Social inclusion, labor force, and "womenomics"
- Progress noted:
- "A significant number of women have joined the workforce."
- Remaining issues:
- Cabinet composition: new Cabinet contains "one woman out of 25."
- IMF view: increasing quality long-term employment for women and expanding childcare capacity would help address productivity shortfalls and manpower constraints.
Tax structure and VAT rates
- IMF recommendation:
- A single consumption tax rate is "probably the most efficient" VAT design.
- Practical considerations:
- A two-rate VAT structure (maintaining eight percent VAT on food and beverages and 10 percent on other goods) "can accommodate the situation particularly of those with low incomes" and is understandable from a policymaker perspective.
External and regional spillovers
- Monetary divergence:
- Japan's prolonged monetary easing supported by IMF; BOJ accommodative policy considered sustainable with clear communication.
- Tighter US monetary policy is affecting Asian markets: net outflows in a number of emerging market economies and greater financing costs for US-dollar borrowers, implying economic and financial impacts.
IMF Communications Department — Transcript of a Press Conference on the Conclusion of the Mission for the 2018 Article IV Consultation with Japan, October 4, 2018.