{
  "title": "Japan: Staff Concluding Statement of the 2023 Article IV Mission",
  "publication": "IMF News, January 26, 2023",
  "sourceUrl": "https://www.imf.org/en/news/articles/2023/01/25/japan-staff-concluding-statement-of-the-2023-article-iv-mission",
  "canonical": "https://www.imf.org/en/news/articles/2023/01/25/japan-staff-concluding-statement-of-the-2023-article-iv-mission",
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  "summary": "Japan: Staff Concluding Statement of the 2023 Article IV Mission",
  "publishDate": "2023-01-26",
  "sections": [
    {
      "heading": "Recent economic developments, outlook, and risks",
      "content": "- Recovery drivers: pent-up demand, supply chain improvements, border reopening, and policy support.\n- Inflation: accelerated in recent months; Japan core inflation (i.e., excluding fresh food) recorded levels not seen in four decades.\n- Near-term outlook:\n  - Output gap projected to close in 2023.\n  - Core inflation projected to peak in the first quarter of 2023 and gradually decline to below 2 percent by end-2024.\n  - Current account surplus estimated at 1.8 percent of GDP in 2022.\n  - External position preliminarily assessed as broadly in line with medium-term fundamentals and desirable policies.\n- Risks:\n  - Downside: deepening geo-economic fragmentation and geopolitical tensions; abrupt slowdown of the global economy; outbreaks of new lethal and highly contagious COVID-19 variants; lingering supply-side constraints; natural disasters; debt sustainability; cyberthreats; abrupt change of the current monetary policy framework.\n  - Upside: stronger recovery of consumption (especially services) and stronger-than-expected recovery of inbound tourism."
    },
    {
      "heading": "Near-term policy challenge and overall economic policy stance",
      "content": "- Main challenge: ensure that the 2 percent inflation target is reached durably, without overshooting significantly, while preserving financial stability; medium-term priority is to reduce fiscal vulnerabilities and transition to a more dynamic, resilient, and inclusive economy.\n- Monetary policy: overall accommodative stance remains appropriate given risk of inflation falling back below the 2 percent target by end-2024 without substantial acceleration in wage growth.\n- Flexibility recommendation: consider more flexibility in longer-term yields to better manage two-sided inflation risks and to facilitate a smoother transition to a neutral monetary stance if warranted.\n- Communication: changes in monetary policy settings should be well communicated.\n- Macroprudential: should seek to curb financial sector vulnerabilities.\n- Fiscal: pandemic-related fiscal support should be withdrawn more quickly; new measures should be limited and targeted to vulnerable households.\n- Labor income: steps needed to boost labor income and achieve a virtuous cycle of income and growth."
    },
    {
      "heading": "Fiscal policy — assessment and recommendations",
      "content": "- Recent fiscal stance:\n  - Primary fiscal deficit expected to stay elevated in 2023 following the October 2022 fiscal package.\n  - The large fiscal package narrowed already limited fiscal space and could add to inflation, possibly requiring stronger monetary tightening.\n- Medium- and long-term outlook:\n  - Under current policies, public debt-to-GDP ratio will increase steadily in the medium and long term.\n  - Primary deficit in percent of GDP projected to decline in the near term as stimulus phases out, but to rise in the medium and long term to accommodate age-related spending pressures.\n  - With public debt-to-GDP ratio on an upward path, interest rates could increase suddenly, and sovereign stress could emerge.\n- Fiscal consolidation: warranted to rebuild fiscal buffers and ensure debt sustainability; should be growth-friendly and credible.\n- Measures to bolster fiscal framework:\n  - Adopting more realistic projections:\n    - Cabinet Office projections have historically been too optimistic; more realistic scenarios and sensitivity analysis are warranted.\n    - A fiscal council could be tasked to evaluate the realism of macro-projections.\n  - Strengthening the fiscal framework:\n    - Budget expenditure ceilings do not limit actual expenditures due to frequent supplementary budgets.\n    - Reform budget process to ensure binding expenditure ceilings and consistency between the annual budget and medium-term fiscal targets.\n    - Supplementary budgets should be infrequent and deployed only for exceptionally large macroeconomic shocks.\n  - Balancing debt sustainability and protecting growth:\n    - Continue to assess progress towards the FY2025 primary balance target, weighing consolidation against the need for support if adverse shocks materialize.\n- Fiscal consolidation requires revenue and expenditure measures. Suggested areas:\n  - Contain health and long-term care costs:\n    - Improve spending efficiency and target measures such as increasing copayments for high-income seniors.\n  - Increase government revenues (options include):\n    - Unifying and raising the consumption tax standard rate.\n    - Increasing corporate taxation.\n    - Strengthening property taxation by removing the preferential treatment of residential land.\n    - Rationalizing allowances and deductions in personal income taxation.\n    - Raising the capital income tax rate.\n    - Increasing premiums of social insurance.\n  - Strengthen the safety net:\n    - Address gap for the working poor; consider an earned income tax credit (EITC) scheme to provide tax credits for low-income earners and rationalize untargeted transfers."
    },
    {
      "heading": "Monetary policy — assessment and options",
      "content": "- Current assessment:\n  - Accommodative monetary policy remains appropriate but must be supported by policies to improve productivity and real wages to achieve 2 percent sustainably.\n  - Exceptionally high uncertainty around baseline inflation projections with risks tilted to the upside.\n  - Upside inflation risks: delayed effects of exchange rate depreciation, border reopening, second-round effects of imported inflation, fiscal support, and higher-than-expected wage growth.\n  - Downside risks: global slowdown, rigidity in inflation expectations, and prolonged weak wage growth.\n- BoJ holdings and market functioning:\n  - BoJ holds close to 70 percent of outstanding 5-year and 10-year JGBs.\n  - Purchases have reduced liquidity in the JGB market and distorted the yield curve; market surveys indicate sharp deterioration in bond market functioning.\n  - BoJ modified the yield curve control (YCC) framework at the December monetary policy meeting.\n- Options to allow further flexibility and increases in long-term yields (BoJ could consider):\n  - Widening the 10-year target band and/or raising the 10-year target.\n  - Shortening the yield curve target.\n  - Shifting from a JGB yield target to a quantity target of JGB purchases.\n  - Considerations:\n    - Widening the 10-year band is a minor adjustment but must be wide enough for market forces to play a leading role.\n    - Quantity-based approach avoids defending a particular yield level but requires state-contingent adjustment of purchase quantities.\n    - Shorter-term yield target ensures short-term yields remain low (important for real activity) but may retain costly side-effects of targeting yield levels.\n- Contingency: if significant upside inflation risks materialize, monetary stimulus withdrawal will have to be much stronger — short-term rates may have to rise much earlier and above the neutral rate.\n- Foreign exchange intervention (FXI):\n  - Authorities intervened in 2022 amid significant yen volatility.\n  - Yen depreciation since March 2022 largely reflects interest rate differentials; analysis suggests depreciation exceeded underlying drivers after June.\n  - FXI can lower excessive volatility and keep yen movements aligned with fundamentals but effects are likely temporary; use should be limited to special circumstances (disorderly markets, risks to financial stability, concerns about de-anchoring inflation expectations)."
    },
    {
      "heading": "Preserving financial stability",
      "content": "- Banking sector: remains resilient with capital adequacy and liquidity ratios above regulatory requirements.\n- Pressures: valuation losses on overseas securities holdings and higher foreign currency funding/hedging costs have weighed on financial institutions.\n- US dollar liquidity resilience: major internationally active banks increasingly rely on more stable foreign-currency funding sources since mid-2010s, but steady efforts to further improve resilience to US dollar liquidity stress are warranted, including assessing risks due to unused committed credit lines at elevated levels.\n- Credit risks and vulnerabilities:\n  - Monitor developments in credit risks, especially exposures to leveraged overseas borrowers and large domestic borrowers in a global slowdown.\n  - Some regional banks more exposed to yen depreciation via credit to non-exporting firms, though overall system impact is limited.\n  - Liquidity conditions of firms unable to pass rising raw material costs to prices should be monitored.\n- Housing/household risks:\n  - Credit imbalances are high by historical standards (partly due to the sharp drop in GDP at pandemic outset).\n  - Growth in housing prices moderate relative to peers, but increasing loan-to-income ratios, rising share of borrowers with high debt servicing ratios, and large fraction of floating-rate mortgages warrant vigilance.\n  - Consider macroprudential policies to curb vulnerabilities from growth in housing loans.\n- Policy tapering implications:\n  - Continue vigilance as pandemic-related support measures taper and consider reducing public credit guarantee ratio for new loans."
    },
    {
      "heading": "Supporting the New Form of Capitalism — labor, innovation, and inclusion",
      "content": "- Three dimensions to boost income growth: labor supply, wage growth, and productivity.\n  - Labor supply:\n    - Promote female and senior labor supply.\n    - Advance work-style reforms including telework; remove social security and tax distortions related to dependent spouses; remove obstacles to employment of older persons.\n  - Wage growth:\n    - Encourage higher wage growth through structural reforms: reduce labor market duality, improve mobility, shift to job-based employment, and merit-based pay.\n  - Productivity:\n    - Strengthen workforce in STEM fields: training and reskilling for existing workers, encourage more students (especially women) to pursue STEM, raise returns to STEM education via merit-based promotions and flexible work arrangements.\n- Startups and open innovation:\n  - Holistic approach addressing labor market constraints, financing, and entrepreneurial education.\n  - Support venture capital; address constraints of personal guarantees; strengthen entrepreneurial education and universities as startup hubs.\n  - Fiscal incentives can be used to increase return on investment, especially in ICT technology and R&D, to encourage firms to invest amid higher cash holdings and rising intangible capital.\n- Digital transformation and public sector digitalization:\n  - Digital Agency should continue coordination and implementation; progress includes expanding “My Number” digital ID cards.\n  - Data sharing between government agencies remains limited, impairing targeted transfers to vulnerable households.\n  - Support standardization of local government IT systems and linking “My Number” to provision of public and private services.\n  - Private sector digital transformation should be supported with IT training, data privacy, digital literacy, consumer protection, and cybersecurity.\n- Corporate governance and trade:\n  - Continue reforms to ensure effective corporate governance practices and disclosure.\n  - Continue working with international partners to strengthen the rules-based multilateral trading system, including ensuring effective WTO dispute settlement."
    },
    {
      "heading": "Transitioning to a low-carbon economy (Green Transformation, GX)",
      "content": "- Current GX strategy: centered on public investment in decarbonization and green technology financed by GX bonds; government to provide incentives for private funding.\n- Carbon pricing:\n  - Government committed to expand carbon pricing from current low levels from FY2028; details not yet decided.\n- Other actions:\n  - Sectoral plans under development; plans to restart nuclear power plants and consider new facilities.\n  - FSA published “Supervisory Guidance on Climate-related Risk Management and Client Engagement”.\n  - BoJ and FSA completed pilot scenario analysis on climate-related risks with major banks and insurers.\n  - BoJ disbursed about 0.6 percent of GDP to banks in its funds-supplying operations to support climate finance.\n- Policy recommendations:\n  - Comprehensive policy package with green investments to decarbonize electricity and transport and gradually rising carbon pricing for a growth-friendly path to targets.\n  - Without strong carbon pricing, achieving targets would be difficult and more costly.\n  - Regulatory actions and elimination of untargeted subsidies for gas, electricity, and fuel would support transition.\n  - Climate policies should protect vulnerable people and enable orderly transition of high-emission sectors.\n  - Green finance should support funding of green and transition activities and management of climate-related financial risks."
    },
    {
      "heading": "Key selected economic indicators (high-level)",
      "content": "- Nominal GDP: US$ 5,006 Billion (2021)\n- GDP per capita: US$ 39,883 (2021)\n- Population: 126 Million (2021)\n- Quota: SDR 30.8 billion (2021)\n\n- Real GDP growth (in percent change)\n  - 2019: -0.4\n  - 2020: -4.3\n  - 2021: 2.1\n  - 2022: 1.4\n  - 2023 (Proj.): 1.8\n  - 2024 (Proj.): 0.9\n\n- Selected components (in percent change, period average where indicated)\n  - Domestic demand 2019–2022: 0.0; -3.4; 1.1; 1.6\n  - Private consumption 2019–2022: -0.6; -4.7; 0.4; 2.2\n  - Gross Private Fixed Investment 2019–2022: 0.2; -5.4; 2.8; 1.9\n  - Business investment 2019–2022: -0.7; -4.9; 2.0; 3.6\n  - Residential investment 2019–2022: 4.1; -7.9; -1.1; (no 2022 entry)\n  - Government consumption 2019–2021: 2.4; 3.5; 0.1\n  - Public investment 2019–2022: 3.4; -1.9; -6.8; 1.7\n  - Stockbuilding 2019–2021: -0.1; -0.5; -0.2\n  - Exports of goods and services 2019–2022: -1.5; -11.6; 11.7; 4.7\n  - Imports of goods and services 2019–2022: 5.1; 7.0; (no 2021 entry)\n\n- Output Gap (in percent)\n  - 2019: 0.7\n  - 2020: -2.9\n  - 2021: -1.6\n  - 2022: -0.9\n\n- Inflation (in percent change, period average)\n  - Headline CPI 2019–2021: 0.5; 2.5; (no 2021 entry)\n  - GDP deflator: (no numbers provided in source)\n\n- General government (in percent of GDP)\n  - Revenue 2019–2022: 34.2; 35.5; 36.6; 36.8; 35.6\n  - Expenditure 2019–2022: 37.3; 44.6; 42.8; 44.8; 42.2; 39.7\n  - Overall Balance 2019–2024: -3.0; -9.1; -6.2; -8.0; -6.6; -4.2\n  - Primary balance 2019–2024: -2.4; -8.4; -5.6; -7.7; -6.5; -4.1\n  - Structural primary balance 2019–2021: -2.6; -7.5; -7.6\n  - Public debt, gross 2019–2024: 236.4; 258.7; 255.4; 258.3; 255.7; 256.4\n\n- Macro-financial and balance-sheet indicators\n  - Base money (end-of-period change, percent) 2019–2022: 19.2; 8.5; -5.0; 3.8\n  - Broad money 2019–2021: 7.4; 2.9; (no 2021 entry)\n  - Credit to the private sector 2019–2021: 3.2; 6.1; 4.0\n  - Non-financial corporate debt in percent of GDP 2019–2022: 139.3; 152.1; 155.7; 154.6; 153.6; 152.6\n\n- Balance of payments (in billions of USD and percent of GDP where provided)\n  - Current account balance (in billions): 176.3; 147.9; 197.3; 76.7; 129.9; 159.5\n  - Percent of GDP (current account): 3.9; 3.1; 3.7; (other years no entries)\n  - Trade balance (in billions): 26.6; 15.6; -116.5; -71.1; -41.3; 0.3; -2.8; -1.7; -1.0 (table formatting preserved as in source)\n  - Exports of goods, f.o.b. (in billions): 695.0; 630.6; 748.6; 758.1; 779.4; 802.9\n  - Imports of goods, f.o.b. (in billions): 693.6; 604.0; 732.9; 874.6; 850.5; 844.3\n  - Energy imports (in billions): 131.9; 89.1; 127.8; 177.3; 147.4; 135.8\n  - Change in reserves (in billions): 25.5; 10.9; 62.8; 20.0; 11.5\n  - Total reserves minus gold (in billions of US$): 1286.3; 1348.2; 1356.2\n\n- Exchange rates (period average where indicated)\n  - Yen/dollar rate: 109.0; 106.8; 109.8\n  - Yen/euro rate: 122.0; 121.9\n  - Real effective exchange rate (ULC-based, 2010=100): 75.1; 74.1; 70.7\n  - Real effective exchange rate (CPI-based, 2010=100): 76.6; 77.3\n\n- Demographic indicators\n  - Population Growth: -0.3\n  - Old-age dependency 2019–2024: 47.6; 48.3; 48.7; 48.9; 49.3; 49.8\n\nJapan: Staff Concluding Statement of the 2023 Article IV Mission\n\n---\n\n\n References\n\n- Transcript on the Press Conference on the Concluding Statement of the 2023 Article IV Mission to 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/2023/01/25/japan-staff-concluding-statement-of-the-2023-article-iv-mission"
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    "Published: January 26, 2023",
    "Recovery drivers: pent-up demand, supply chain improvements, border reopening, and policy support.",
    "Inflation: accelerated in recent months; Japan core inflation (i.e., excluding fresh food) recorded levels not seen in four decades.",
    "Near-term outlook:",
    "Risks:",
    "Main challenge: ensure that the 2 percent inflation target is reached durably, without overshooting significantly, while preserving financial stability; medium-term priority is to reduce fiscal vulnerabilities and transition to a more dynamic, resilient, and inclusive economy.",
    "Monetary policy: overall accommodative stance remains appropriate given risk of inflation falling back below the 2 percent target by end-2024 without substantial acceleration in wage growth.",
    "Flexibility recommendation: consider more flexibility in longer-term yields to better manage two-sided inflation risks and to facilitate a smoother transition to a neutral monetary stance if warranted.",
    "Communication: changes in monetary policy settings should be well communicated.",
    "Macroprudential: should seek to curb financial sector vulnerabilities.",
    "Fiscal: pandemic-related fiscal support should be withdrawn more quickly; new measures should be limited and targeted to vulnerable households.",
    "Labor income: steps needed to boost labor income and achieve a virtuous cycle of income and growth.",
    "Recent fiscal stance:",
    "Medium- and long-term outlook:",
    "Fiscal consolidation: warranted to rebuild fiscal buffers and ensure debt sustainability; should be growth-friendly and credible.",
    "Measures to bolster fiscal framework:",
    "Fiscal consolidation requires revenue and expenditure measures. Suggested areas:",
    "Current assessment:",
    "BoJ holdings and market functioning:",
    "Options to allow further flexibility and increases in long-term yields (BoJ could consider):",
    "Contingency: if significant upside inflation risks materialize, monetary stimulus withdrawal will have to be much stronger — short-term rates may have to rise much earlier and above the neutral rate.",
    "Foreign exchange intervention (FXI):",
    "Banking sector: remains resilient with capital adequacy and liquidity ratios above regulatory requirements.",
    "Pressures: valuation losses on overseas securities holdings and higher foreign currency funding/hedging costs have weighed on financial institutions.",
    "US dollar liquidity resilience: major internationally active banks increasingly rely on more stable foreign-currency funding sources since mid-2010s, but steady efforts to further improve resilience to US dollar liquidity stress are warranted, including assessing risks due to unused committed credit lines at elevated levels.",
    "Credit risks and vulnerabilities:",
    "Housing/household risks:",
    "Policy tapering implications:",
    "Three dimensions to boost income growth: labor supply, wage growth, and productivity.",
    "Startups and open innovation:",
    "Digital transformation and public sector digitalization:",
    "Corporate governance and trade:",
    "Current GX strategy: centered on public investment in decarbonization and green technology financed by GX bonds; government to provide incentives for private funding.",
    "Carbon pricing:",
    "Other actions:",
    "Policy recommendations:",
    "Nominal GDP: US$ 5,006 Billion (2021)",
    "GDP per capita: US$ 39,883 (2021)",
    "Population: 126 Million (2021)",
    "Quota: SDR 30.8 billion (2021)",
    "Real GDP growth (in percent change)",
    "Selected components (in percent change, period average where indicated)",
    "Output Gap (in percent)",
    "Inflation (in percent change, period average)",
    "General government (in percent of GDP)",
    "Macro-financial and balance-sheet indicators",
    "Balance of payments (in billions of USD and percent of GDP where provided)",
    "Exchange rates (period average where indicated)",
    "Demographic indicators",
    "[Transcript on the Press Conference on the Concluding Statement of the 2023 Article IV Mission to Japan](https://www.imf.org/en/news/articles/2023/01/27/tr012623-japan-press-conference-concluding-statement-2023-article-iv-mission)",
    "[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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