IMF Executive Board Concludes 2026 Article IV Consultation with Japan

IMF News, April 3, 2026

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The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Japan.
Directors commended Japan’s strong economic resilience in the face of global shocks.
Directors concurred that the war in the Middle East poses significant new risks to the outlook.
Key priorities emphasized by Directors:
- Continue rebuilding fiscal buffers.
- Proceed with monetary policy normalization.
- Advance labor market reforms to support sustained real wage gains.
- Maintain a flexible exchange rate as a credible shock absorber.
- Continue implementation of the 2024 Financial Sector Assessment Program’s recommendations, particularly on the macroprudential framework, financial sector oversight, and systemic risk monitoring.

Recent performance:
- The Japanese economy has displayed impressive resilience; output is growing above potential.
- Domestic demand has been robust and unemployment remains low.
- After three decades of near-zero inflation, prices grew faster than the BOJ’s target for over three and a half years before moderating in January.
- Nominal wages are rising at a historic pace, but high inflation has eroded household purchasing power.
Projections:
- Growth is projected to remain strong in 2026, but to moderate to 0.8 percent due to weaker external demand and the impact from the conflict in the Middle East.
- Private investment and consumption are expected to remain strong.
- From 1.3 percent y/y in February, inflation is expected to rise in 2026 before converging to the BOJ’s target in 2027.
- Risks to the outlook and inflation are broadly balanced.

Recent fiscal performance has exceeded expectations, but:
- The deficit is expected to widen in 2026.
- Spending on interest and health and long-term care for the aging population will continue to rise, eventually leading to an increase in the debt-to-GDP ratio from 2035.
Director recommendations:
- Fiscal prudence is needed, including a plan to keep debt-to-GDP on a firmly downward path.
- Adopt a more neutral fiscal stance in the near term and growth-friendly fiscal adjustments in the medium term, underpinned by a credible fiscal framework.
- Any temporary suspension of the consumption tax on food and beverage items should be targeted to vulnerable households and firms, temporary, and budget neutral.
- Improve expenditure efficiency and advance durable revenue mobilization measures.

Directors agreed that the Bank of Japan (BOJ) is appropriately withdrawing monetary accommodation.
Guidance:
- As underlying inflation converges toward the BOJ’s target, gradual rate hikes toward neutral should continue.
- Support for a flexible, well‑communicated, and data-dependent approach, given heightened uncertainty about external conditions and the neutral rate.
- Commended the BOJ for the smooth implementation of its balance sheet reduction and encouraged continued monitoring of the Japanese Government Bond market functioning.

Directors concurred that Japan’s financial system remains broadly resilient.
Noted potential vulnerabilities:
- Foreign exchange exposures.
- Structural challenges in some regional banks.
- Valuation risks in commercial real estate.
- Growing participation of non-bank financial institutions.
Recommendation: Continued vigilance and implementation of FSAP recommendations, particularly on macroprudential framework, financial sector oversight, and systemic risk monitoring.

Directors encouraged reforms to enhance labor market flexibility and mobility, including through reskilling and upskilling to address AI-related labor displacement.
Remove distortions discouraging labor supply to sustain real wage growth.
Welcomed Japan’s continued support for IMF activities and commitment to multilateral economic cooperation.
Recommended pursuing deeper trade integration and ensuring industrial policies are narrowly targeted, time-bound, and subject to cost‑benefit analysis.

Inflation (period average, percent change):
- Headline CPI 2024: 2.7
- Core CPI (ex. fresh food & energy) 2024: 3.0
- (Other panel entries include 2022–2026 values: Headline CPI 2.5; 2023 3.2; Core CPI 3.9; 2023 2.4)

Non-financial corporate debt (percent of GDP, end-of-period):
- 153.9 (2022), 150.3 (2023), 149.7 (2024), 152.7 (2025), 153.1 (2026), 153.2 (2027), 153.4 (2028), 153.5 (2029), 153.7 (2030)

Exchange rates (period average):
- Yen/dollar rate: 131.5 (2022), 140.5 (2023), 151.4 (2024)
- Yen/euro rate: 138.6 (2022), 152.0 (2023), 163.8 (2024), 169.0 (2025)
- Real effective exchange rate (ULC-based, 2010=100): 62.4 (2022), 56.7 (2023), 52.8 (2024), 52.4 (2025)
- Real effective exchange rate (CPI-based, 2010=100): 61.2 (2022), 58.1 (2023), 55.0 (2024), 56.1 (2025)

Memorandum items:
- Old-age dependency: 48.8 (2022), 48.9 (2023), 49.2 (2024), 49.7 (2025), 50.1 (2026), 50.5 (2027), 50.9 (2028), 51.4 (2029), 52.0 (2030), 53.1 (2031)

IMF Communications Department, April 3, 2026 — Press Release No. 26/105