Transcript: International Monetary Fund Japan AIV Press Conference
IMF News, February 18, 2026
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- Published: February 18, 2026
Economic outlook
- Japanese economy described as "showing impressive resilience in the face of elevated uncertainty and U.S. tariffs."
- Growth:
- "Strong growth of 1.1 percent last year."
- "We see growth remaining strong in 2026 at 0.8 percent."
- "When we take into account the decline in population, this corresponds to growth in per capita output of about 1.3 percent."
- Output is running somewhat above capacity, creating a "positive output gap" visible in labor shortages.
- Private sector dynamics:
- "Private investment is expected to strengthen further."
- "Private consumption will be supported by a gradual rise in real wages."
- Trade shocks:
- U.S. tariffs had limited aggregate impact; effects concentrated in certain sectors (particularly the auto sector).
- A subsequent trade deal reduced tariffs, though "the average tariff rate is much higher than what it was before."
Inflation and monetary policy
- Inflation profile:
- "Inflation has been running above the Bank of Japan's target for over three and a half years."
- "Inflation has started to moderate, falling to 2.1 percent year-on-year in December."
- Expectation: "inflation to moderate further in 2026 as global oil and food prices ease, and to converge to the Bank of Japan's 2-percent target during 2027."
- Monetary policy stance and guidance:
- "The BOJ is appropriately withdrawing monetary accommodation."
- Staff expect "gradual interest rate hikes should continue to move the policy rate toward a neutral level next year" if the baseline forecast materializes.
- Uncertainty about the neutral rate emphasized due to Japan's long period of low inflation and near-zero interest rates.
- Numerical projections used for the IMF macro baseline:
- Policy rate "around 1.2 percent by end 2026 and 1.5 percent in 2027."
- This profile corresponds to "roughly two hikes in ‘26 and one hike in ‘27."
- Neutral rate estimate range: "from 1.1 to 2.2."
- Midpoint cited for projections: "1.5."
- Recommendation: BOJ should "remain data-dependent and ... flexible" and maintain independence and credibility to keep inflation expectations anchored.
- Exchange rate and pass-through:
- IMF view: "there is no right level of nominal exchange rate"; authorities committed to "a flexible exchange rate regime."
- Recent yen depreciation has not produced large average import price increases in 2025, but continued depreciation could raise pass-through to import prices and headline inflation.
- Yen depreciation in the second half of 2025 "may have helped Japanese exporters absorb some of the US tariff increases and is definitely supporting services exports."
Fiscal policy
- Current stance and performance:
- "Japan's recent fiscal performance has been strong."
- "The primary deficit is now smaller than it was before the pandemic and is among the smallest deficits in the G7."
- Nonetheless, "Japan's debt level remains elevated" and is "the highest among major economies."
- Future fiscal risks and projections:
- "We expect the interest bill to continue rising over time and to double between 2025 and 2031."
- Aging-related spending pressures: rising spending for health and long-term care will add to fiscal pressures and "eventually lead to a further increase in deficits and public debt."
- Policy guidance:
- "Fiscal policy should not loosen in the near term."
- Recent gains "should be preserved, and growth-friendly fiscal adjustments should continue in coming years."
- Maintain buffers for shocks (e.g., natural disasters).
- Emphasize composition of spending: reallocate toward "high-quality public investment, particularly in education, skill development, and innovation," and strengthen human capital spending.
- Suggested reforms to create fiscal space: health care cost containment without quality loss; pension reforms such as "gradually increasing the eligibility age in line with the rising life expectancy"; unwind poorly targeted measures including energy subsidies.
- Consumption tax proposal:
- Authorities considering "a two-year suspension of the consumption tax on food and beverages" with financing to avoid additional JGB issuance.
- Estimated cost of the proposed two-year suspension: "about 5 trillion yen or 0.8 percent of GDP annually."
- IMF view: removing the consumption tax would weaken revenue base; limiting the cut "to essential goods and ensuring it is temporary" would help contain fiscal costs.
- Targeted support alternatives: "a system of refundable tax credits ... if well designed, could provide better targeted support to the most vulnerable Japanese households."
Financial sector, JGB market, and investors
- Financial sector resilience:
- "Japan's financial sector remains broadly resilient, supported by robust capital and liquidity positions."
- "Overall, systemic risk has not materially changed from the 2025 Article IV consultation."
- JGB market dynamics and foreign participation:
- Foreign investor holdings: "On a stock basis, foreign investors hold about 13 percent of outstanding JGBs."
- Foreign flows and segmental importance:
- "Foreigners have accounted for around 21 percent of purchases in the super long-dated JGBS and close to 30 percent in the 10-year segment."
- Growing participation from NBFIs (including mutual funds and hedge funds) has supported liquidity and trading depth as BOJ reduces its footprint.
- Market pricing shows investors increasingly attentive to fiscal management (rise in term premia, steepening yield curve), but "no evidence that foreign investors have withdrawn their demand due to fiscal concerns."
Labor market, demographics, and structural policies
- Labor market tightness:
- Labor shortages are visible and contribute to the positive output gap and wage dynamics.
- Policy recommendations to address supply constraints:
- Multi-pronged domestic reforms are critical.
- Continue to raise labor force participation (women and elderly); remove policy distortions that disincentivize labor supply.
- Improve labor mobility to support durable real wage growth and bargaining power.
- Invest in human capital, reskilling, and training to adapt to labor-saving technologies (including AI).
- "Making effective use of foreign labor through a gradual and targeted expansion of inflows, particularly in sectors facing acute shortages," is recommended as a complementary measure.
Risks, balance, and key policy messages
- Risks:
- "Risks to the inflation outlook are balanced."
- "Risks to growth are tilted to the downside," including rising trade restrictions (e.g., recent strains between Japan and China).
- Main domestic risk: "that consumption weakens if nominal wage growth continues to be outpaced by inflation, such that real wage growth fails to turn positive."
- Key policy messages:
- Preserve fiscal gains and avoid near-term loosening; pursue growth-friendly fiscal adjustments and maintain buffers.
- BOJ should continue gradual, data-dependent withdrawal of accommodation and protect its independence and credibility.
- Strengthen labor market policies, labor mobility, reskilling, and consider targeted foreign labor inflows to address demographic shortages.
- Target support for vulnerable households should be budget-neutral, temporary, and well-targeted (e.g., refundable tax credits rather than broad consumption tax cuts).
Transcript: International Monetary Fund Japan AIV Press Conference — February 18, 2026 — IMF Communications Department