## Japan: Staff Concluding Statement of the 2023 Article IV Mission

_IMF News, January 26, 2023_

## Source details

**Canonical URL:** [Japan: Staff Concluding Statement of the 2023 Article IV Mission](https://www.imf.org/en/news/articles/2023/01/25/japan-staff-concluding-statement-of-the-2023-article-iv-mission)

## Other formats

- [Markdown version](/en/news/articles/2023/01/25/japan-staff-concluding-statement-of-the-2023-article-iv-mission/index.md)
- [Structured JSON version](/en/news/articles/2023/01/25/japan-staff-concluding-statement-of-the-2023-article-iv-mission/index.json)
- [Bundle manifest](/en/news/articles/2023/01/25/japan-staff-concluding-statement-of-the-2023-article-iv-mission/bundle-manifest.json)

## Bibliographic details
- Published: January 26, 2023

---

### Recent economic developments, outlook, and risks
- 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:
  - Output gap projected to close in 2023.
  - Core inflation projected to peak in the first quarter of 2023 and gradually decline to below 2 percent by end-2024.
  - Current account surplus estimated at 1.8 percent of GDP in 2022.
  - External position preliminarily assessed as broadly in line with medium-term fundamentals and desirable policies.
- Risks:
  - 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.
  - Upside: stronger recovery of consumption (especially services) and stronger-than-expected recovery of inbound tourism.

### Near-term policy challenge and overall economic policy stance
- 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.

### Fiscal policy — assessment and recommendations
- Recent fiscal stance:
  - Primary fiscal deficit expected to stay elevated in 2023 following the October 2022 fiscal package.
  - The large fiscal package narrowed already limited fiscal space and could add to inflation, possibly requiring stronger monetary tightening.
- Medium- and long-term outlook:
  - Under current policies, public debt-to-GDP ratio will increase steadily in the medium and long term.
  - 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.
  - With public debt-to-GDP ratio on an upward path, interest rates could increase suddenly, and sovereign stress could emerge.
- Fiscal consolidation: warranted to rebuild fiscal buffers and ensure debt sustainability; should be growth-friendly and credible.
- Measures to bolster fiscal framework:
  - Adopting more realistic projections:
    - Cabinet Office projections have historically been too optimistic; more realistic scenarios and sensitivity analysis are warranted.
    - A fiscal council could be tasked to evaluate the realism of macro-projections.
  - Strengthening the fiscal framework:
    - Budget expenditure ceilings do not limit actual expenditures due to frequent supplementary budgets.
    - Reform budget process to ensure binding expenditure ceilings and consistency between the annual budget and medium-term fiscal targets.
    - Supplementary budgets should be infrequent and deployed only for exceptionally large macroeconomic shocks.
  - Balancing debt sustainability and protecting growth:
    - Continue to assess progress towards the FY2025 primary balance target, weighing consolidation against the need for support if adverse shocks materialize.
- Fiscal consolidation requires revenue and expenditure measures. Suggested areas:
  - Contain health and long-term care costs:
    - Improve spending efficiency and target measures such as increasing copayments for high-income seniors.
  - Increase government revenues (options include):
    - Unifying and raising the consumption tax standard rate.
    - Increasing corporate taxation.
    - Strengthening property taxation by removing the preferential treatment of residential land.
    - Rationalizing allowances and deductions in personal income taxation.
    - Raising the capital income tax rate.
    - Increasing premiums of social insurance.
  - Strengthen the safety net:
    - 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.

### Monetary policy — assessment and options
- Current assessment:
  - Accommodative monetary policy remains appropriate but must be supported by policies to improve productivity and real wages to achieve 2 percent sustainably.
  - Exceptionally high uncertainty around baseline inflation projections with risks tilted to the upside.
  - 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.
  - Downside risks: global slowdown, rigidity in inflation expectations, and prolonged weak wage growth.
- BoJ holdings and market functioning:
  - BoJ holds close to 70 percent of outstanding 5-year and 10-year JGBs.
  - Purchases have reduced liquidity in the JGB market and distorted the yield curve; market surveys indicate sharp deterioration in bond market functioning.
  - BoJ modified the yield curve control (YCC) framework at the December monetary policy meeting.
- Options to allow further flexibility and increases in long-term yields (BoJ could consider):
  - Widening the 10-year target band and/or raising the 10-year target.
  - Shortening the yield curve target.
  - Shifting from a JGB yield target to a quantity target of JGB purchases.
  - Considerations:
    - Widening the 10-year band is a minor adjustment but must be wide enough for market forces to play a leading role.
    - Quantity-based approach avoids defending a particular yield level but requires state-contingent adjustment of purchase quantities.
    - Shorter-term yield target ensures short-term yields remain low (important for real activity) but may retain costly side-effects of targeting yield levels.
- 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):
  - Authorities intervened in 2022 amid significant yen volatility.
  - Yen depreciation since March 2022 largely reflects interest rate differentials; analysis suggests depreciation exceeded underlying drivers after June.
  - 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).

### Preserving financial stability
- 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:
  - Monitor developments in credit risks, especially exposures to leveraged overseas borrowers and large domestic borrowers in a global slowdown.
  - Some regional banks more exposed to yen depreciation via credit to non-exporting firms, though overall system impact is limited.
  - Liquidity conditions of firms unable to pass rising raw material costs to prices should be monitored.
- Housing/household risks:
  - Credit imbalances are high by historical standards (partly due to the sharp drop in GDP at pandemic outset).
  - 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.
  - Consider macroprudential policies to curb vulnerabilities from growth in housing loans.
- Policy tapering implications:
  - Continue vigilance as pandemic-related support measures taper and consider reducing public credit guarantee ratio for new loans.

### Supporting the New Form of Capitalism — labor, innovation, and inclusion
- Three dimensions to boost income growth: labor supply, wage growth, and productivity.
  - Labor supply:
    - Promote female and senior labor supply.
    - Advance work-style reforms including telework; remove social security and tax distortions related to dependent spouses; remove obstacles to employment of older persons.
  - Wage growth:
    - Encourage higher wage growth through structural reforms: reduce labor market duality, improve mobility, shift to job-based employment, and merit-based pay.
  - Productivity:
    - 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.
- Startups and open innovation:
  - Holistic approach addressing labor market constraints, financing, and entrepreneurial education.
  - Support venture capital; address constraints of personal guarantees; strengthen entrepreneurial education and universities as startup hubs.
  - 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.
- Digital transformation and public sector digitalization:
  - Digital Agency should continue coordination and implementation; progress includes expanding “My Number” digital ID cards.
  - Data sharing between government agencies remains limited, impairing targeted transfers to vulnerable households.
  - Support standardization of local government IT systems and linking “My Number” to provision of public and private services.
  - Private sector digital transformation should be supported with IT training, data privacy, digital literacy, consumer protection, and cybersecurity.
- Corporate governance and trade:
  - Continue reforms to ensure effective corporate governance practices and disclosure.
  - Continue working with international partners to strengthen the rules-based multilateral trading system, including ensuring effective WTO dispute settlement.

### Transitioning to a low-carbon economy (Green Transformation, GX)
- 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:
  - Government committed to expand carbon pricing from current low levels from FY2028; details not yet decided.
- Other actions:
  - Sectoral plans under development; plans to restart nuclear power plants and consider new facilities.
  - FSA published “Supervisory Guidance on Climate-related Risk Management and Client Engagement”.
  - BoJ and FSA completed pilot scenario analysis on climate-related risks with major banks and insurers.
  - BoJ disbursed about 0.6 percent of GDP to banks in its funds-supplying operations to support climate finance.
- Policy recommendations:
  - Comprehensive policy package with green investments to decarbonize electricity and transport and gradually rising carbon pricing for a growth-friendly path to targets.
  - Without strong carbon pricing, achieving targets would be difficult and more costly.
  - Regulatory actions and elimination of untargeted subsidies for gas, electricity, and fuel would support transition.
  - Climate policies should protect vulnerable people and enable orderly transition of high-emission sectors.
  - Green finance should support funding of green and transition activities and management of climate-related financial risks.

### Key selected economic indicators (high-level)
- 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)
  - 2019: -0.4
  - 2020: -4.3
  - 2021: 2.1
  - 2022: 1.4
  - 2023 (Proj.): 1.8
  - 2024 (Proj.): 0.9

- Selected components (in percent change, period average where indicated)
  - Domestic demand 2019–2022: 0.0; -3.4; 1.1; 1.6
  - Private consumption 2019–2022: -0.6; -4.7; 0.4; 2.2
  - Gross Private Fixed Investment 2019–2022: 0.2; -5.4; 2.8; 1.9
  - Business investment 2019–2022: -0.7; -4.9; 2.0; 3.6
  - Residential investment 2019–2022: 4.1; -7.9; -1.1; (no 2022 entry)
  - Government consumption 2019–2021: 2.4; 3.5; 0.1
  - Public investment 2019–2022: 3.4; -1.9; -6.8; 1.7
  - Stockbuilding 2019–2021: -0.1; -0.5; -0.2
  - Exports of goods and services 2019–2022: -1.5; -11.6; 11.7; 4.7
  - Imports of goods and services 2019–2022: 5.1; 7.0; (no 2021 entry)

- Output Gap (in percent)
  - 2019: 0.7
  - 2020: -2.9
  - 2021: -1.6
  - 2022: -0.9

- Inflation (in percent change, period average)
  - Headline CPI 2019–2021: 0.5; 2.5; (no 2021 entry)
  - GDP deflator: (no numbers provided in source)

- General government (in percent of GDP)
  - Revenue 2019–2022: 34.2; 35.5; 36.6; 36.8; 35.6
  - Expenditure 2019–2022: 37.3; 44.6; 42.8; 44.8; 42.2; 39.7
  - Overall Balance 2019–2024: -3.0; -9.1; -6.2; -8.0; -6.6; -4.2
  - Primary balance 2019–2024: -2.4; -8.4; -5.6; -7.7; -6.5; -4.1
  - Structural primary balance 2019–2021: -2.6; -7.5; -7.6
  - Public debt, gross 2019–2024: 236.4; 258.7; 255.4; 258.3; 255.7; 256.4

- Macro-financial and balance-sheet indicators
  - Base money (end-of-period change, percent) 2019–2022: 19.2; 8.5; -5.0; 3.8
  - Broad money 2019–2021: 7.4; 2.9; (no 2021 entry)
  - Credit to the private sector 2019–2021: 3.2; 6.1; 4.0
  - Non-financial corporate debt in percent of GDP 2019–2022: 139.3; 152.1; 155.7; 154.6; 153.6; 152.6

- Balance of payments (in billions of USD and percent of GDP where provided)
  - Current account balance (in billions): 176.3; 147.9; 197.3; 76.7; 129.9; 159.5
  - Percent of GDP (current account): 3.9; 3.1; 3.7; (other years no entries)
  - 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)
  - Exports of goods, f.o.b. (in billions): 695.0; 630.6; 748.6; 758.1; 779.4; 802.9
  - Imports of goods, f.o.b. (in billions): 693.6; 604.0; 732.9; 874.6; 850.5; 844.3
  - Energy imports (in billions): 131.9; 89.1; 127.8; 177.3; 147.4; 135.8
  - Change in reserves (in billions): 25.5; 10.9; 62.8; 20.0; 11.5
  - Total reserves minus gold (in billions of US$): 1286.3; 1348.2; 1356.2

- Exchange rates (period average where indicated)
  - Yen/dollar rate: 109.0; 106.8; 109.8
  - Yen/euro rate: 122.0; 121.9
  - Real effective exchange rate (ULC-based, 2010=100): 75.1; 74.1; 70.7
  - Real effective exchange rate (CPI-based, 2010=100): 76.6; 77.3

- Demographic indicators
  - Population Growth: -0.3
  - Old-age dependency 2019–2024: 47.6; 48.3; 48.7; 48.9; 49.3; 49.8

*Japan: Staff Concluding Statement of the 2023 Article IV Mission*

---


## References

- [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)

_Source: https://www.imf.org/en/news/articles/2023/01/25/japan-staff-concluding-statement-of-the-2023-article-iv-mission_