Transcript of Press Briefing on Japan Article IV

IMF News, February 7, 2025

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Projected growth to accelerate to 1 .1 percent in 2025.
Growth in per capita terms of 1 .6 percent (reflecting the declining population).
Pickup in 2025 driven by private consumption as wages are expected to grow faster than inflation and boost household purchasing power.
Output gap remains closed; demand broadly aligned with the economy's capacity.
Inflation has been running about the central bank’s target for more than two years and is expected to converge to 2 percent by the end of 2025 as global food and oil prices moderate.
Tight labor market expected to keep wages growing in the medium term, supporting sustained inflation at the Bank of Japan's 2-percent target.
Risks to growth are tilted to the downside:
- External risks: slowdown in the global economy, increasing trade restrictions, more volatile commodity prices.
- Domestic risk: weak consumption if wages continue to be outpaced by inflation.

Inflationary environment is helping Japan's fiscal performance by boosting tax revenues, contributing to lower-than-expected deficit and debt levels relative to the last Article IV.
Japan's debt-to-GDP ratio remains high, limiting fiscal space to respond to future shocks (e.g., natural disasters).
Public debt-to-GDP ratio expected to increase steadily in a few years due to rising interest payments and spending on health and long-term care for an aging population.
Policy recommendations:
- Fiscal consolidation is needed to rebuild fiscal buffers and ensure debt sustainability.
- Adopt a clear plan that includes both revenue measures and expenditure measures while making fiscal policy more growth friendly.
- In the short term, consider phasing out energy subsidies and offsetting new spending commitments with higher revenues or savings elsewhere in the budget.

IMF calendar-based measure: general government primary deficit predicted to increase slightly from 2 .1 percent in 2024 to 2 .2 percent in 2025 (based on the budget sent to the Diet).
Warning: from 2030 onwards, interest costs and aging-related expenses will push Japanese debt-to-GDP on an increasing path absent consolidation.

Since February last year, the Bank of Japan has ended yield curve control, quantitative and qualitative easing, and negative interest rate policies.
Under its simplified framework, the Bank has delivered two hikes to its policy rate, bringing it to its highest level since 2007.
The Bank is reducing the pace of government bond purchases, gradually shrinking its balance sheet.
IMF view:
- Normalization has gone smoothly, reflecting good timing, communication, and a gradual but firm approach.
- Underlying inflation (including services prices and wages) still needs support for monetary policy to sustainably converge to the 2-percent target.
- IMF supports the Bank of Japan's recent policy decision and its data dependent and flexible approach.
- Accommodation should continue to be withdrawn gradually if the economy evolves in line with the baseline forecast, reaching a neutral level by the end of 2027.
- Given elevated uncertainty, the Bank should maintain a data dependent approach and clear communications to anchor market expectations.
Financial sector: handling rising interest rates well, supported by strong capital and liquidity buffers; systemic risks have risen slightly since the last Article IV.

Aging and shrinking workforce contributing to labor shortages in many sectors.
Adoption of new technologies like artificial intelligence can alleviate some labor shortages by enhancing workers' productivity.
Policy recommendation: ensure workers of all ages receive training to fully benefit from new technologies.

IMF is closely tracking recent trade policy announcements, pauses, tariffs, and retaliatory measures.
Spillover impacts depend on:
- Duration of measures.
- Types of country responses.
- Categories of goods affected.
Specific channels:
- Higher barriers and cost pressure in major trading partners could spill over to Japan, affecting exports and growth.
- Example: 2024 weaker growth partly reflected a decline in exports to China.
Policy advice: countries should work together to resolve disagreements and preserve an enabling environment for international trade.

IMF supports Japan maintaining flexible exchange rates.
Effects of yen depreciation:
- Exporting firms earn larger profits, which can support investment.
- Weak yen encourages tourism, benefiting the economy.
- Some imported goods become more expensive; overall pass-through to inflation assessed to be quite mild, though certain categories and income-constrained households may feel larger effects.

Inflation composition:
- Services inflation remains below 2 percent, supporting the case for continued accommodative posture while monitoring wages and services prices.
- Nearly three years of inflation above target after three decades of near-zero inflation suggests promising signs of a durable shift toward the 2-percent target, but uncertainty remains.
Global monetary divergence:
- Bank of Japan's large steps (ending yield curve control, moving out of negative rates, quantitative tightening) have been managed smoothly.
- Clear communication and data dependence help maintain orderly market conditions amid diverging central bank paths.
Fiscal consolidation urgency:
- IMF emphasizes starting consolidation now rather than delaying, with a clear medium-term fiscal framework to ensure sustainability and build buffers for shocks.

IMF Communications Department — Transcript of Press Briefing, February 7, 2025