On November 21, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Japan.
The Japanese economy is growing above its estimated potential. After a temporary soft patch early in the year, domestic demand recovered in the second quarter. With external demand expected to remain supportive, and despite recent natural disasters, real GDP growth is projected to remain above trend in 2018 at 1.1 percent. Headline and core inflation have gained momentum in recent months on the back of higher energy prices but remain well below Bank of Japan’s (BoJ) two percent inflation target.
The current account surplus increased marginally in 2017, due to a stronger income balance, but is expected to shrink by the end of 2018 due to smaller goods trade and income balances. The real effective exchange rate appreciated slightly in the first nine months of 2018 relative to end2017. As with the 2017 external sector assessment, the projected 2018 current account balance is preliminarily assessed as in line with the current account level consistent with fundamentals and desirable policies.
Underlying growth is expected to remain solid, notwithstanding the scheduled increase in the consumption tax rate in October 2019. However, absent mitigating fiscal measures, the consumption tax increase could lead to volatility in private consumption and investment. Meanwhile, monetary policy is expected to remain accommodative and support favorable financial conditions. Over the medium term, growth is projected to moderate and the output gap close. Following a consumption tax-induced spike in 2020, inflation will rise over the medium term, but likely remain below the BoJ’s target.
Executive Board Assessment[2]
Executive Directors welcomed Japan’s remarkable economic growth performance, especially in per capita terms, and the prospect of continued above-potential growth in the near term. Directors nevertheless noted that inflation remains below target and that downside risks have risen, notably from the upcoming consumption tax rate increase and deteriorating global conditions. Moreover, intensifying demographic headwinds continue to pose challenges. Directors emphasized the need to reinvigorate the policies of “Abenomics” to achieve sustained high growth, durable reflation, and public debt sustainability.
Directors generally underscored the importance of maintaining a neutral fiscal stance to support near-term growth and reflation. They welcomed the authorities’ plan to implement temporary measures to alleviate the adverse impact of the scheduled increase in the consumption tax rate, accompanied by clear communication to the public. For the medium term, Directors saw merit in developing a well-specified fiscal framework, based on realistic assumptions, to reduce policy uncertainty and anchor a gradual consolidation path toward debt sustainability while addressing demographic challenges. While an independent fiscal institution could be helpful in this regard, some Directors saw scope to achieve these objectives within the existing institutional arrangements.
Directors welcomed the authorities’ ambitious structural reform agenda aimed at lifting potential growth. They stressed the importance of strong government commitment to mutually-supportive reforms, with priority given to labor market reforms to enhance labor supply including from female, older, and foreign workers. Directors recommended further efforts to eliminate tax and social security disincentives to full-time and regular work, reduce the gender wage gap, and increase the availability of childcare and nursing facilities. They also encouraged the authorities to further deregulate product and services markets, facilitate entry and exit of firms, promote small- and medium-sized enterprises, and deepen corporate governance reform.
Directors agreed that monetary policy should remain accommodative, possibly for an extended period to successfully reflate the economy, while carefully monitoring and mitigating sideeffects. They stressed that effective communication and forward guidance would help reduce market volatility and guide inflation expectations.
Directors recognized the challenges facing the financial sector, especially from demographic pressures and low interest rates. They welcomed the progress made in implementing the 2017 FSAP recommendations, in particular, the new more forward-looking supervisory framework.
Directors highlighted the importance of enhancing risk management, financial oversight, and the macroprudential framework. They welcomed the authorities’ close engagement with regional financial institutions to help adapt their business models to demographic trends. Directors also saw priority in facilitating financial institutions’ use of Fintech and strengthening crypto-asset oversight.
Directors took note of the staff’s assessment that Japan’s 2018 external position and real exchange rate are projected to be broadly consistent with fundamentals and desirable policies. They agreed that a credible fiscal consolidation plan combined with bolder structural reforms are needed to maintain external balance over the medium term. Directors also noted that advancing multilateralism would help mitigate inward spillovers from heightened trade tensions, and appreciated Japan’s leadership role on this front.
Directors commended the authorities for volunteering to participate in the Fund’s initiative to assess efforts to address supply-side of corruption in Japan’s Article IV consultation. They looked forward to continued progress in enforcing foreign bribery laws.
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Table. Japan: Selected Economic Indicators, 2012–19 |
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Nominal GDP: US$ 4,873 Billion (2017) |
GDP per capita: US$ 38,444 (2017) |
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Population: 127 Million (2017) |
Quota: SDR 30.8 billion (2017) |
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2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
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Proj. |
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(In percent change) |
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Growth 1/ |
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Real GDP |
1.5 |
2.0 |
0.4 |
1.4 |
1.0 |
1.7 |
1.1 |
0.9 |
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Domestic demand |
2.3 |
2.4 |
0.4 |
1.0 |
0.4 |
1.2 |
0.9 |
1.1 |
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Private consumption |
2.0 |
2.4 |
-0.9 |
0.0 |
0.1 |
1.0 |
0.6 |
0.8 |
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Business investment |
4.1 |
3.7 |
5.4 |
3.4 |
0.6 |
2.9 |
4.7 |
3.4 |
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Residential investment |
2.5 |
8.0 |
-4.3 |
-1.0 |
5.7 |
2.7 |
-6.7 |
0.9 |
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Government consumption |
1.7 |
1.5 |
0.5 |
1.5 |
1.3 |
0.4 |
0.5 |
1.1 |
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Public investment |
2.7 |
6.7 |
0.7 |
-1.7 |
-0.1 |
1.2 |
-1.8 |
-5.9 |
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Stockbuilding 2/ |
0.0 |
-0.4 |
0.1 |
0.3 |
-0.2 |
-0.1 |
0.1 |
0.0 |
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Net exports 2/ |
-0.8 |
-0.4 |
0.0 |
0.3 |
0.6 |
0.5 |
0.1 |
0.0 |
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Exports of goods and services 3/ |
-0.1 |
0.8 |
9.3 |
2.9 |
1.7 |
6.7 |
3.9 |
2.1 |
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Imports of goods and services 3/ |
5.4 |
3.3 |
8.3 |
0.8 |
-1.6 |
3.4 |
3.2 |
2.3 |
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Output Gap |
-3.7 |
-2.2 |
-2.6 |
-2.0 |
-1.8 |
-0.7 |
-0.3 |
0.1 |
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(In annual average) |
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Inflation |
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CPI 4/ |
-0.1 |
0.3 |
2.8 |
0.8 |
-0.1 |
0.5 |
1.2 |
1.3 |
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CPI excluding VAT |
-0.1 |
0.3 |
1.2 |
0.3 |
-0.1 |
0.5 |
1.2 |
1.1 |
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Core Core CPI excluding VAT 5/ |
-0.4 |
-0.2 |
0.7 |
0.9 |
0.6 |
0.1 |
… |
… |
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GDP deflator |
-0.8 |
-0.3 |
1.7 |
2.1 |
0.3 |
-0.2 |
0.8 |
1.5 |
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Unemployment rate |
4.3 |
4.0 |
3.6 |
3.4 |
3.1 |
2.9 |
2.9 |
2.9 |
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(In percent of GDP) |
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Government |
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General government |
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Revenue |
30.8 |
31.6 |
33.3 |
34.2 |
34.1 |
33.2 |
33.2 |
33.3 |
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Expenditure |
39.4 |
39.5 |
38.9 |
38.0 |
37.8 |
37.5 |
36.9 |
36.0 |
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Overall Balance |
-8.6 |
-7.9 |
-5.6 |
-3.8 |
-3.7 |
-4.3 |
-3.7 |
-2.8 |
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Primary balance |
-7.5 |
-7.0 |
-4.9 |
-3.2 |
-2.9 |
-3.8 |
-3.3 |
-2.6 |
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Structural primary balance |
-6.3 |
-6.4 |
-4.6 |
-3.6 |
-3.4 |
-3.7 |
-3.3 |
-2.6 |
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Public debt, gross |
229.0 |
232.5 |
236.1 |
231.3 |
235.6 |
237.6 |
238.2 |
236.6 |
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(In percent change, end-period) |
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Macro-financial |
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Base money |
10.7 |
45.8 |
36.7 |
29.1 |
22.8 |
9.7 |
10.6 |
9.3 |
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Broad money |
2.2 |
3.5 |
2.9 |
3.0 |
3.9 |
3.5 |
3.6 |
3.1 |
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Credit to the private sector |
2.2 |
4.1 |
2.0 |
1.9 |
2.4 |
4.4 |
3.5 |
3.0 |
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Non-financial corporate debt in percent of GDP |
143.1 |
142.0 |
143.0 |
137.9 |
136.9 |
139.7 |
146.7 |
147.0 |
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Household debt in percent of disposable income |
98.3 |
100.2 |
100.8 |
100.5 |
100.8 |
101.7 |
101.1 |
101.0 |
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(In percent) |
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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 |
-0.1 |
… |
… |
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Three-month CD rate (annual average) |
0.3 |
0.2 |
0.2 |
0.2 |
0.1 |
0.0 |
… |
… |
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Official discount rate (end-period) |
0.3 |
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 |
0.1 |
0.2 |
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(In billions of USD) |
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Balance of payments |
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Current account balance |
59.7 |
45.9 |
36.8 |
136.4 |
194.9 |
196.1 |
183.7 |
196.2 |
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Percent of GDP |
1.0 |
0.9 |
0.8 |
3.1 |
3.9 |
4.0 |
3.6 |
3.8 |
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Trade balance |
-53.9 |
-90.0 |
-99.9 |
-7.4 |
51.4 |
44.5 |
34.7 |
43.0 |
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Percent of GDP |
-0.9 |
-1.7 |
-2.1 |
-0.2 |
1.0 |
0.9 |
0.7 |
0.8 |
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Exports of goods, f.o.b. |
776.0 |
695.0 |
699.7 |
622.1 |
636.3 |
689.2 |
750.0 |
766.6 |
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Imports of goods, f.o.b. |
829.9 |
784.9 |
799.7 |
629.5 |
585.0 |
644.8 |
715.3 |
723.7 |
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Energy imports |
272.2 |
257.4 |
241.8 |
133.8 |
94.9 |
117.8 |
153.5 |
150.9 |
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(In percent of GDP) |
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FDI, net |
1.9 |
2.8 |
2.4 |
3.0 |
2.7 |
3.1 |
2.6 |
2.8 |
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Portfolio Investment |
0.5 |
-5.4 |
-0.9 |
3.0 |
5.6 |
-1.1 |
-0.9 |
-0.8 |
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(In billions of USD) |
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Change in reserves |
-37.9 |
38.7 |
8.5 |
5.1 |
-5.7 |
23.6 |
10.5 |
11.0 |
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Total reserves minus gold (in billions of US$) |
1227.2 |
1237.3 |
1231.0 |
1207.1 |
1188.4 |
1232.4 |
… |
… |
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(In annual average) |
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Exchange rates |
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Yen/dollar rate |
79.8 |
97.6 |
105.9 |
121.0 |
108.8 |
112.2 |
109.8 |
109.3 |
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Yen/euro rate |
102.6 |
129.6 |
140.8 |
134.3 |
120.4 |
126.7 |
130.3 |
127.9 |
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Real effective exchange rate (ULC-based, 2010=100) |
106.5 |
86.3 |
78.2 |
75.3 |
85.1 |
78.3 |
… |
… |
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Real effective exchange rate (CPI-based, 2010=100) |
100.6 |
80.4 |
75.2 |
70.2 |
79.6 |
75.6 |
… |
… |
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(In percent) |
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Demographic Indicators |
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Population Growth |
-0.2 |
-0.2 |
-0.2 |
-0.1 |
0.0 |
-0.2 |
-0.2 |
-0.3 |
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Old-age dependency |
37.8 |
39.8 |
41.8 |
43.5 |
44.8 |
46.0 |
46.9 |
47.8 |
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Sources: IMF, Competitiveness Indicators System; OECD, and IMF staff estimates and projections as of October 2018 World Economic Outlook. |
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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/ 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, 2015, and 2019. |
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5/ Bank of Japan Measures of Underlying Inflation; excluding fresh food & energy. |
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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.
