Via IMF (Den Internationale Valutafond)

On January 30, 2020, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation


with Japan.

The Japanese economy is growing above its estimated potential, despite
a significantly weaker external environment. Private consumption and
public spending supported growth in the first three quarters of 2019,
while exports and export-driven investment have softened in line with
weaker external conditions. The two-percentage point increase in the
consumption tax rate in October 2019 appears to have had less impact
than the last rate increase in 2014, due in part to government
countermeasures. Real GDP growth is estimated to be above potential in
2019 at 1.0 percent. While the output gap is narrowing and labor
markets remain tight, overall wage growth and inflation expectations
remain stagnant. CPI headline inflation and the BOJ’s core-core
inflation (excluding fresh food and energy) have risen in recent months
but remain below the Bank of Japan’s two-percent inflation target.

Japan’s external current account surplus is estimated to have shrunk in
2019 to about 3.3 percent of GDP, reflecting a smaller goods trade
balance due to adverse external conditions. Japan’s income
surplus—arising from its large net foreign asset position and high net
returns—accounts for the bulk of its current account surplus. Over the
last four decades, the current account surplus has been relatively
stable, with rising corporate savings being offset by public sector and
household dissaving. Through November 2019, the yen appreciated by 2.5
percent (in real effective terms) relative to end-2018, although
markets remain volatile reflecting changes in global risk aversion and
the monetary policy stances of major central banks. As with the 2019 External Sector Report, the 2019 external position is
preliminarily assessed as broadly consistent with medium-term
fundamentals and desirable policies.

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Underlying growth is expected to remain resilient, bolstered by fiscal
and monetary support, with near-term inflation reaching about one
percent. Macroeconomic challenges will increase as demographic
headwinds intensify. Supportive near-term fiscal policy and continued
monetary accommodation will help sustain growth momentum and support
reflation, while there is a need for gradual fiscal adjustment and
consolidation, given fast-growing age-related expenditures. Structural
reforms will lift long-run growth and support reflation, while
strengthened financial sector policies will help contain the build-up
of systemic risks. Over the medium term, growth is projected to
moderate to near potential and the output gap will gradually close.
Headline inflation is expected to edge up slowly but remain below the
Bank of Japan’s two-percent target.

Executive Board Assessment


Executive Directors welcomed Japan’s resilient economic growth
performance despite external headwinds. Directors noted that inflation
remains below target and downside risks weigh on the outlook, including
from adverse demographics and weaker global growth. Against the
backdrop of an aging and shrinking population, which has become central
to Japan’s macroeconomic policies and outcomes, Directors emphasized
the need to strengthen the mutually reinforcing policies of “Abenomics”
and accelerate reforms to achieve sustained high growth, durable
reflation, and public debt sustainability.

Directors agreed that monetary policy should remain accommodative while
improving coordination with financial sector policies to enhance the
sustainability of monetary stimulus and mitigate risks to financial
stability. They highlighted the importance of clear communication of
policy guidance to markets. Directors considered that the current
monetary policy framework is working well under the circumstances,
although there may be scope to explore possible options to strengthen
the framework over time with a view to further improving policy
flexibility and credibility.

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Noting the challenges associated with prolonged low interest rates and
rising demographic pressures, Directors stressed the need to
proactively strengthen the resilience of the banking sector. They
encouraged the authorities to consider tightening macroprudential
policies and stand ready to activate the countercyclical capital
buffer. They also recommended that efforts continue to further improve
financial sector supervision and regulation, the risk assessment
process, and the macroprudential policy toolkit. Directors were
encouraged by progress made in implementing the 2017 FSAP
recommendations. They welcomed the authorities’ close engagement with
regional financial institutions to help them adapt their business

Directors welcomed the recent fiscal stimulus package and agreed that a
broadly neutral fiscal stance is appropriate for the near term. They
noted that a medium-term fiscal framework that is well specified and
underpinned by realistic assumptions would help ensure fiscal
sustainability, lower policy uncertainty, and increase investor and
consumer confidence. Directors recommended consideration of options to
further strengthen the redistribution effects of taxation, improve
incentives to reduce energy use, and cushion the impact of the
consumption tax rate increase on the most vulnerable. They also
highlighted the need to reform healthcare and public social security
programs to improve spending efficiency, pension sustainability, and
intergenerational equity.

Directors welcomed the ambitious agenda of structural reforms aimed
at supporting reflation, productivity, labor supply, and growth.
They considered labor market reforms as a priority, particularly
measures to improve the 2018 Work Style Reform and increase the
participation of female, elderly, and foreign workers. Directors
encouraged continued efforts to ease regulations on product and
service sectors, deepen corporate governance reform, and facilitate
alternative sources of financing for small- and medium-sized
enterprises. They commended the authorities for promoting climate change awareness
and advancing mitigation and adaptation policies.

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Directors took note of the staff’s preliminary assessment that Japan’s
2019 external position is assessed to be broadly consistent with
fundamentals and desirable policies. They noted that a medium-term
fiscal consolidation plan and bolder structural reforms that support
domestic demand are needed to maintain external balance. Directors also
commended the Japanese authorities for their commitment to further
advance multilateralism.

Directors welcomed progress in combating the supply side of
transnational corruption and encouraged further steps to improve
enforcement of foreign bribery cases.