Japan: Staff Report for the 2014 Article IV Consultation
IMF Staff Country Reports, July 31, 2014
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Bibliographic details
- Published: July 31, 2014
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9781498357302.002
Key assessment and macro outlook
- Abenomics is gaining traction, but progress across the three arrows has been uneven and medium-term risks remain substantial.
- Inflation has risen, a consumption tax increase has been implemented, and there are signs of a transition to private-led growth.
- Uncertainty is high whether the recovery and exit from deflation will become self sustained under current policies.
- Japan’s external position is assessed as broadly in balance—compared to moderately undervalued last year—because of structural changes in the external sector, including from the offshoring of production and sustained high energy imports.
Structural reform priorities (policy recommendations)
- The next round of structural reforms should:
- lift labor supply,
- reduce labor market duality,
- enhance risk capital provision, and
- accelerate agricultural and services sector deregulation.
- Corporate governance reforms already underway could help reduce firms’ preference for large cash holdings.
- Plans to lower the corporate tax rate have growth benefits, but should proceed in combination with measures to offset revenue losses and be consistent with plans to restore fiscal sustainability.
Fiscal policy and public debt (findings and recommendations)
- A concrete medium-term fiscal reform plan is urgently needed.
- Given very high levels of public debt, implementation of the second consumption tax increase is critical to establish a track record of fiscal discipline.
- Adoption of a concrete medium-term fiscal consolidation plan beyond 2015 would build confidence in the sustainability of public finances and allow more flexibility to respond to downside risks.
Monetary policy (findings and guidance)
- Monetary policy is appropriately accommodative.
- With inflation and inflation expectations increasing, no further easing is needed at this point.
- In case downside risks to the inflation outlook materialize, the Bank of Japan (BoJ) should act swiftly through further and/or longer-dated asset purchases.
- Communication should focus on achieving 2 percent inflation in a stable manner aided by a more transparent presentation of the BoJ’s forecast and underlying assumptions.
Financial sector stability and risks
- The financial sector remains stable.
- Portfolio rebalancing by financial institutions and investors is desirable but also raises new risks, including from greater overseas engagement.
- In regional banks, limited growth opportunities and low net interest margins could further undermine core profitability and weaken capital buffers.
- Supervisors should continue to be proactive in monitoring these risks.
Spillovers and global implications
- Launching all three arrows will create benefits for the region and the global economy.
- Spillovers via the trade channel and capital flows are expected to increase in coming years with uncertain net effects—higher exports and capital outflows—in the short term.
- As long as Japan continues to proceed with its reforms, incomes will rise and fiscal risks decline, which will be positive for the global economy.