## Transcript: International Monetary Fund Japan AIV Press Conference

_IMF News, February 18, 2026_

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## Bibliographic details
- Published: February 18, 2026

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### 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*

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## References

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