Transcript

Speaker:

 Rahul Anand, IMF Mission Chief for Japan

 

Moderator:

Randa Elnagar, Senior Media Officer, IMF Communications Department

 

ELNAGAR: Good morning to those who are viewing us from Japan.  And good evening to those who are joining us from D.C.  Welcome to the Press Briefing on the Japan 2026 Article IV Consultation.  

I am Randa Elnagar of the IMF's Communications Department.  Today, I'm happy to be joined by Rahul Anand, IMF Chief for Japan.  

Let me note that we have Japanese language interpretation for the press conference.  Please use the interpretation function as needed.  

By now, you should have received the IMF concluding statement in both English and Japanese language.  With that, I will turn to Rahul, who will deliver his opening remarks, and then we will be taking your questions.  

Rahul, over to you.  

ANAND: Thanks, Randa.  Good evening to you all here in Washington, and a good morning to those of you joining us from Tokyo.  

I'd like to start by thanking the authorities at the Ministry of Finance, the Bank of Japan, and other ministries, as well as our many counterparts in the private sector, academia, and labor unions, for their engagement during this Article IV Consultation.  We appreciate their time and willingness to discuss the Japanese economy with our team over the past few weeks.  

Let me start by summarizing our revised economic outlook for Japan.  Our takeaway is that the Japanese economy is showing impressive resilience in the face of elevated uncertainty and U.S. tariffs.  After strong growth of 1.1 percent last year, we see growth remaining strong in 2026 at 0.8 percent.  This is up slightly with respect to the forecast made in our January World Economic Outlook Update.  

Private investment is expected to strengthen further, while private consumption will be supported by a gradual rise in real wages.  When we take into account the decline in population, this corresponds to growth in per capita output of about 1.3 percent.  And this strong growth is leading to a positive output gap, meaning that output is running somewhat higher than the economy's capacity, something that is visible in the labor shortages faced by Japanese companies.  

Inflation has been running above the Bank of Japan's target for over three and a half years, but inflation has started to moderate, falling to 2.1 percent year-on-year in December.  We expect 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.  

Sovereign bond yields have climbed rapidly and have become more volatile.  This reflects several factors.  One is higher expected policy rates, which is a good sign that markets have gained confidence that inflation will converge to the BOJ's target.  Another is higher term premia, which reflects external factors like heightened geopolitical tensions that had affected interest rates in many advanced economies.  But it also reflects domestic factors like perceptions of domestic uncertainty and of higher fiscal risks.  

Risks to the inflation outlook are balanced, but those to growth are tilted to the downside, including from rising trade restrictions such as those related to the recent strains between Japan and China.  Domestically, we still think the main risk is that consumption weakens if nominal wage growth continues to be outpaced by inflation, such that real wage growth fails to turn positive.  

Let me turn now to our policy advice, where I will touch on a few key areas, noting that the concluding statement includes a more comprehensive overview of the policy discussions we have had.  

The first is fiscal policy.  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.  For the next several years, we project that nominal growth in the economy will outpace the interest burden on the public debt, and this will contribute to a declining debt-to-GDP ratio.  This recent performance is welcome.  

However, Japan's debt level remains elevated.  In fact, it is the highest among major economies, and we expect the interest bill to continue rising over time and to double between 2025 and 2031.  This will happen at the same time as spending increases for the health and long-term care of Japan's aging population.  We project that this will eventually lead to a further increase in deficits and public debt.  

This is why we think fiscal policy should not loosen in the near term.  Instead, recent gains should be preserved, and growth-friendly fiscal adjustments should continue in coming years.  Buffers should be kept for when they would be most needed, such as a future shock from a natural disaster.  

The second area is monetary policy.  We see the BOJ is appropriately withdrawing monetary accommodation.  If our baseline forecast materializes, we think gradual interest rate hikes should continue to move the policy rate toward a neutral level next year. It's important to note that there is a lot of uncertainty about the level of the neutral rate in Japan because the economy has spent a long time with very low inflation and interest rates around zero.  That's why it's appropriate for the BOJ to remain data-dependent and to remain flexible if conditions change.  

The BOJ's continued independence and credibility will help keep inflation expectations well anchored.  The BOJ continues to smoothly reduce the size of its balance sheet and its outsized footprint in the JGB market. It is striking the right balance between improving market functioning and managing risks of disrupting the market.  

The third area is financial sector policies.  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.  

Finally, our team engaged closely on labor market policies as we are seeing strong investment in labor-saving technologies, including artificial intelligence.  It is important for active labor market policies to help workers to adapt.  We also think that higher mobility would allow Japanese workers to gain bargaining power, supporting wage growth.  

I will close by saying that we are grateful for Japan's continued leadership in the international community, for being a champion of international collaboration, and for its very strong partnership with the IMF.  Back to you, Randa.  

ELNAGAR: Thank you so much, Rahul.  I will ask our viewers now on WebEx to raise their hands and put their camera on to ask their question.  Our colleagues on WebEx, if you can raise your hand and ask your question.  

Leika, please go ahead.  

QUESTIONER:  Hello, can you hear me?  

ELNAGAR: Yes.  

QUESTIONER:  Great.  Thank you for the presentation.  I have two questions.  One is about the IMF's view on Japan's fiscal policy.  The statement says that Japan should avoid reducing the consumption tax. Still, it also says limiting the tax cut to essential goods and beverages and ensuring it is temporary would help contain fiscal costs.  So I just want to clarify, in sum, does the IMF find that it would be okay for Japan to proceed with the Prime Minister's proposed suspension on the tax to apply to food?  

And then my second question is about monetary policy.  I recall the IMF has said it saw Japan's neutral rate to be in a band of 1-2 percent with a midpoint of 1.5 percent.  Just wanted to check if that estimate remains unchanged and if so, would the IMF see at the chance of the BOJ raising interest rates once or twice this year?  Thank you.  

ELNAGAR: Thank you.  I think we have a lot of questions on monetary and fiscal, so I'm going to combine them because Rahul has already –we're going to focus on all of them, but we're going to start with monetary policy. 

So, if anyone else has a question on monetary policy, please raise your hand.  Okay, I can see someone.  Anyone on monetary policy.  Okay.   

QUESTIONER:  Hello, can you hear me?  

ANAND: Yes.  

QUESTIONER:  Yeah, related to monetary policy, I'd like to ask about the statement saying the BOJ's continued independence and credit credibility will help keep inflation expectation well anchored.  In a concluding statement where you mentioned independence, I was just wondering whether you see any concerns about BOJ's independence was from the government.  

ELNAGAR: Okay, anyone else on monetary policy?  Okay, Rahul. 

ANAND: Thank you for your questions on the monetary policy.  As we mentioned in the concluding statement, and I mentioned in my opening remarks too, the BOJ is appropriately withdrawing monetary accommodation.  Staff welcome the BOJ's recent policy rate decisions over the past year, including pausing rate hikes as the impact of external shocks was being ascertained and resuming in December as the Japanese economy showed resilience and there was growing evidence that inflation will stabilize at the BOJ's target.  So we expect that gradual rate hikes should continue to move the policy rate toward neutral if the baseline forecast continues to materialize.  

And in terms of the gradual withdrawal of accommodation under our baseline, we project that this would bring the policy rate to a neutral level in 2027 as inflation converges to the BOJ's target of 2 percent.  Let me reiterate that there's a lot of uncertainty about the level of the neutral rate in Japan because the economy has spent a long time with very low inflation and interest rates around zero.  Therefore, a flexible and data-dependent approach remains appropriate for the Bank of Japan when deciding on the policy rate changes. 

Then there was a question on the independence.  So Bank of Japan has been independent and has been communicating its policy advice.  So that's what we say, and it has helped anchor inflation expectations, and going forward, we expect it to continue.  

ELNAGAR: Thank you very much, Rahul.  We're going to go now to others.  Please raise your hand and identify yourself.  

Okay, there is no further questions.  Maybe we can go back to fiscal.  Rahul, there was a question on fiscal.  

ANAND: Yes, let me – so on the question on consumption tax, the authorities are discussing a two-year suspension of the consumption tax on food and beverages, along with sources of financing that would prevent the need for additional JGB issuance.  The proposed two-year suspension is estimated to cost about 5 trillion yen or 0.8 percent of GDP annually.  Removing the consumption tax would weaken the tax revenue base since the consumption tax is an important way to raise revenues without creating distortions in the economy.  And Japan needs to safeguard government revenue to avoid eroding fiscal space and help contain fiscal risk.  

So, we acknowledge that higher cost of living may be hurting certain households.  The best way to support vulnerable households and firms most affected by rising costs of living or large external shock should be targeted, budget-neutral, and temporary.  Let me clarify.  The authorities are not considering removing the consumption tax.  They are considering limiting the consumption tax cut to essential goods and ensuring it is temporary.  This would help contain fiscal costs.  We will be able to assess better the effect of the consumption tax cut when we get more clarity on how it will be financed.  

Given scarce public resources, a system of refundable tax credits, under discussion for introduction after the two-year suspension that the authorities are proposing, if well designed, could provide better targeted support to the most vulnerable Japanese households.  

ELNAGAR: Thank you, Rahul.  If anyone else is going to raise their hands, please do so.  

While we're waiting for our reporters to raise their hands, I'm going to read a question that we received. “What is the impact of US tariffs on Japan's overall economic performance?  Are IMF experts concerned about the impact of Prime Minister Takaichi’s expansionary budget policies and what risks they may have for Japan's debt level and inflation?”  

I think you already answered the fiscal question, so let's focus on the trade question.  Rahul, please.  

ANAND: Yes, so Japan and U.S. has entered a trade deal.  So the impact of US tariffs on Japan has been much less than what we initially expected.  The domestic demand, domestic consumption, and investment has kind of offset some of the impact of the tariffs, and the impact of tariffs has been limited to certain sectors, particularly the auto sector in Japan.  

However, as I mentioned earlier, growth in Japan has been resilient despite the shock, and with the trade deal, the tariffs have come down, but we have to acknowledge that the average tariff rate is much higher than what it was before.  So overall, we have not seen a huge impact that we were expecting at the beginning of last year.  

ELNAGAR: Thank you, Rahul.  I don't see any hands raised again.  So I'm going to read a question.  

“The concluding statement notes that foreign investors are playing a growing role in the JGB market, contributing to better market functioning, but may be making more sensitive to maybe more making it more sensitive to fiscal news and global developments.  How big a role are foreign investors playing now and how strong do you assess their concerns to be about – to be about expansionary fiscal policy going forward?”

ANAND: Thank you for the question.  So on a stock basis, foreign investors hold about 13 percent of outstanding JGBs.  This is still a relatively small share, with the majority of JGBs still held by domestic investors.  However, their importance has been larger on the basis of recent flows and in certain maturity segments.  For example, 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.  This growing participation has supported liquidity and trading depth, particularly as the Bank of Japan reduces its footprint in the market.  

While the full composition of foreign investors is not observable, available data suggests that participation has become more active among NBFIs, including mutual funds and hedge funds.  Past evidence has shown that these investors might be more responsive to shifts in global financial conditions, which might increase the sensitivity of JGB yields, particularly at the long end, where traditional domestic natural demand, such as from life insurers, has weakened.  

Regarding fiscal concerns, market pricing indicates that investors are increasingly attentive to fiscal management as reflected in the rise in term premia and the steepening of the yield curve.  However, there is no evidence that foreign investors have withdrawn their demand due to fiscal concerns.  

ELNAGAR: Thank you, Rahul.  I see a hand raised there.  So please put on your camera, identify yourself, and organization.  

QUESTIONER:  Hi there

ELNAGAR: Hi.  

QUESTIONER:  You might have already answered the questions from others.  I might have missed it, but I sent three questions during my registration, so I'm just going to read a couple of them.  

First of all, the BOJ policy.  Maybe you cannot comment specifically, but if you don't want to comment, you just have to say no comment.  The first one is how far do you think the Bank should go to remove the excess monetary stimulus which, which means like, 0.05 to 1, about 1 percent, and also how often, like every six months?  That was my first question, and I'll skip the second one on fiscal.  

And the third question was the dollar remains strong against yen, which is basically keeping Japan's import costs high.  But data has shown that weak yen does not really boost Japan's export volumes, and Japanese firms have survived a much stronger yen in the past.  So from a historical perspective, roughly 100 yen to the dollar seems to be a nice and round average figure.  And so my question is, do you think that's a reasonable level for both households and businesses in Japan?  Thank you.  

ELNAGAR: Thank you.  Can I add one more thing because another questioner, also asked about the yen?  “What is the IMF's analysis on the impact by recent depreciation of the Japanese yen?”  Thank you.  

ANAND: Sure.  No, thanks for the questions.  So, going back to the monetary question, Max, as I mentioned, a gradual withdrawal of accommodation remains appropriate under our baseline.  Under our projections, this would bring the policy rate to a neutral rate level in 2027 as inflation converges to the BOJ's target of 2 percent.  And I mentioned earlier, there's a lot of uncertainty about the level of neutral rate in Japan because the economy has spent a long time with very low inflation and interest rates around zero.  Therefore, a flexible and data-dependent approach remains appropriate.

For the purpose of our macroeconomic projections, we assume that the policy rate will rise gradually, to around 1.2 percent by end 2026 and 1.5 percent in 2027.  However, this corresponds to roughly two hikes in ‘26 and one hike in ‘27.  However, we do not have a view on the precise timing at which meeting the rate hikes will occur.  Let me reiterate, as I said, we don't have – because there was a question also on the neutral rate – we have a range which we have re-estimated to be from 1.1 to 2.2.  But as I mentioned, there's a huge uncertainty around the neutral rate in Japan.  

QUESTIONER:  So just to confirm that you're saying 25 basis points in each hike, so one this year and one next year.  So 50 altogether?  

ANAND: No, I'm saying reaching – reaching the midpoint for our macroeconomic projections.  We have assumed the midpoint of the range that I gave just for our macroeconomic baseline projections.  So that's 1.5.  So we are assuming two hikes in ‘26 and one hike in ‘27.  But we don't have any view on the timing of these hikes.  

QUESTIONER:  Okay, thanks.  That's great.  Thanks.  

ANAND: And then you had a question on the –

ELNAGAR: The yen.

ANAND: So let me tell you, we don't think there is a right level of nominal exchange rate.  And so, that's our view.  There's no right level of exchange rate.  And as we have seen with an open economy, open capital account, the yen has been moving around, and the Japanese authorities are committed to a flexible exchange rate regime.  And therefore, the price or the value of yen is determined by market forces.  And that's how the flexible exchange rate regime works.  So we don't think there is a right level of yen under the nominal value.  

So then the question was on the recent depreciation and its impact.  From an inflation standpoint, yen depreciation can lead to higher import prices and hence higher inflation.  However, we haven't seen that; Japan's import prices have remained largely unchanged on average over 2025.  In part, this could be because the overall change in the value of yen during 2025 has been small, notwithstanding periods of significant appreciation followed by depreciation.  

If we were to see a period of continued yen depreciation over a longer period of time, we should see an increased pass-through to higher import prices and headline inflation.  However, we are mindful that some of the households, which use high–imported goods, this may have caused a cost-of-living issue.  

In terms of trade, 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.  

ELNAGAR: Thank you, Rahul.  I see a hand raised.  Do you have another question, or is this an old hand?  

QUESTIONER: I just have one question left on the supply the labor shortage.  You think that, given Japan's demographic (inaudible), the supply constraints from a tight labor market would mean Japan would experience elevated inflation for longer.  What is the risk of this happening, you think?  Thank you.  

ELNAGAR: Let me follow up on this question because I have a similar question from another colleague, and he is asking, “With Japan facing severe labor shortages and rapid population aging, does the IMF recommend expanding foreign labor inflows or reforming immigration policies as possible part of Japan's growth strategy?” So, it's quite –

ANAND: Thanks for these questions.  So addressing Japan's demographic-driven labor shortages will require a multi–pronged approach.  The critical set of reforms to tackle demographic challenges are domestic.  However, significant progress has been made in raising labor force participation of women and elderly in recent years.  There is room for further improvement, including by removing policy distortions that disincentivize labor supply.  Similarly, reforms to improve labor mobility will be important to achieve durable real wage growth.  

Investment in labor-saving technology can also play a role to leverage AI while managing its labor market impact.  Measures should include improving labor mobility improvements, investing in human capital, including through reskilling and training.  

Making effective use of foreign labor through a gradual and targeted expansion of inflows, particularly in sectors facing acute shortages, could help offset the falling labor supply and support Japanese growth.  

ELNAGAR: That's it.  Okay, any further questions from our viewers?  Webex or online?  

Okay, I don't see anyone raising their hands or any further questions.  I see someone there.  Please go ahead.  Anthony Rowley.  You're muted.   

Okay, I see another hand while we sort the audio.  There is a hand, but there is no name there.  

QUESTIONER:  Hi there,  if I may, might as well just ask my third question.  I wanted to ask you, Rahul, how can any government achieve a responsible sort of restrictive but at the same time assertive expansion in fiscal policy goal for a sustained period, and under what economic conditions could it happen?  Thank you.

ANAND: So, as I mentioned in my opening remarks, the fiscal performance in Japan has been very strong.  The debt-to-GDP ratio is back to or is lower than pre-pandemic 2019 level, and the deficits have come down.  The primary deficit is very low, one of the lowest amongst G7.  So Japan has some fiscal space.  However, fiscal restraint is warranted to prevent the erosion of buffers and preserve the capacity to respond to shocks, as I mentioned earlier, including from natural disasters, which would also help maintain stable conditions in the JGB market.  

Within this constraint, we think that fiscal policy can remain growth-friendly by focusing on the composition of adjustment rather than just the size growth.  Enhancing reallocation toward high-quality public investment, particularly in education, skill development, and innovation, can significantly mitigate the near-term growth impact of fiscal adjustments while strengthening long-term potential.  Improving the quality of public investment and strengthening human capital spending would support long-term growth while reinforcing fiscal sustainability.  

At the same time, there is hope to create fiscal space through structural fiscal or structural spending reforms.  There is scope to enhance efficiency through health care reforms that contain costs while preserving quality, and pension reforms such as gradually increasing the eligibility age in line with the rising life expectancy in Japan.  In addition, current spending remains elevated related to pre-pandemic levels, underscoring the need to unwind poorly targeted measures, including energy subsidies.  

So such a balance is most feasible when policy is guided by a robust medium-term fiscal framework with a clearly defined fiscal anchor and a strong link between annual budgets and medium-term planning.  

ELNAGAR: Thank you, Rahul.  I think we have two minutes left.  Did you sort out the audio?  No.  Okay, we took your question earlier, so I'm going to go to other colleague raising their hand.  As for the last question at this point, because we cannot sort the audio, we can respond to them to, Anthony, by email.  

QUESTIONER:  Hi.  Thank you very much for taking all my questions.  I have an additional question on FX rate.  You have mentioned that there is no right level of Japanese yen exchange rate.  Then, in what case should the Japanese authority implement intervention in currency market?  What is the condition on that point?  What is your view on that point?  Thank you very much.  

ANAND: So, we cannot speculate on authorities' future actions, and I would like to mention that the authorities have recurrently affirmed their commitment to a flexible exchange rate regime.  Japan's flexible exchange rate regime helps absorb the impact of shocks and supports monetary policy's focus on price stability.  So that's all I can say in response to your question.  

QUESTIONER: Thank you.  

ELNAGAR: Thank you, Rahul.  We come to the end of our briefing.  Unfortunately, we cannot unmute you.  So, I'm going to respond to your question by email if that is possible.  

So let me end the briefing by thanking Rahul and thanking you all for joining us tonight and in the morning in Tokyo.  The video recording and transcript will be available on IMF.org, and see you in future briefings.  Thank you.