Via IMF (Den Internationale Valutafond)

Japan 2019 Article IV Mission Press Conference

November 25, 2019


Good afternoon. It is always a great learning experience and a pleasure to come to Japan. This time I am here in my new capacity as Managing Director of the IMF and I’d like to take a moment to thank the authorities for their support and for their wonderful hospitality. 

Japan is a champion of the multilateral system and has been an invaluable partner to the IMF—not only in addressing global macroeconomic and financial concerns, but also as a leading supporter of the IMF in capacity development for our membership. We will continue to count on Japan’s leadership as we work together to address current and future challenges to the global economy. We very much look forward to our continued close collaboration. 

The main objective of my visit is to participate in our annual Article IV Consultation. In addition, I took the opportunity to learn first hand more about Japan’s efforts to cope with climate crises—which we were recently dramatically reminded of by October’s Typhoon 19. Allow me to offer our condolences on the tragic loss of life and destruction it caused. We empathize with the Japanese people, we are encouraged by the government’s determined efforts to deal with the aftermath, and most importantly, to further build disaster resilience. And based on a visit I made yesterday to Tokyo’s Metropolitan area flood control system, there is clearly much the world could learn from Japan on coping with climate change.

Let me move to the main topic of today’s press briefing—the conclusions of our Article IV Consultations, which I had the opportunity to discuss with Deputy Prime Minister Asō, Bank of Japan Governor Kuroda, and Minister of State Nishimura. And I look forward to meeting Prime Minister Abe later today. You have received a copy of our concluding statement, so I will limit my remarks to some key points.

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The central theme of this year’s consultation was Japan’s demographic transition—the rapid aging and shrinking of the population and the workforce. In particular, we focused on how to identify the greatest risks, and ways to address the challenges this transition poses to productivity, economic growth, government revenues and expenditures, and financial stability. 

Japan’s recent economic performance has been solid, and its economy is expected to remain resilient. Under current policies, we expect Japan’s economy to expand by 0.8 percent in real terms in 2019. For 2020, real GDP growth is projected to slow to 0.5 percent, as external demand remains soft and dampens export-related investment. Evidence so far indicates that the October consumption tax increase has been implemented smoothly, due to the government’s countermeasures.

Japan’s resilience will be tested—most immediately by a synchronized global slowdown, and over the medium-term by uncertainties in the world economy, and by its own demographic trends. We project that growth will remain in line with Japan’s estimated potential growth rate of about 0.5 percent. Headline consumer price inflation is projected to continue its slow upward trend towards—but still below— the Bank of Japan’s 2 percent target.  

There are several downside risks to this outlook. These include a sharper-than-anticipated global slowdown and heightened uncertainty, softening of the near-term durability of domestic demand, and rising financial stability risks in the midst of prolonged accommodative monetary policy. Vulnerability to climate change and natural disasters also remain large for Japan.   

How will Japan navigate safely through these challenges and potential risks? Will it be able to generate higher productivity and sustained and inclusive growth even while it confronts a dramatic demographic shift? These were the main topics in our discussions with the authorities—and three elements stood out.

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First, seven years into Abenomics notable successes are clearly visible. Economic growth has been above potential for three years. Japan has also had strong per capita GDP growth compared to other advanced economies, and disposable income inequality has been contained. The risk of deflation has receded; the fiscal deficit has been reduced; unemployment is very low; and a substantial number of women have joined the work force.  But there is clearly space to do more to strengthen the outlook. Inflation remains well below BoJ’s target, public debt is not yet on a sustainable path, and household incomes remain stagnant. 

Demographic change—the rapid aging and shrinking of the population and the labor force—will likely exacerbate these challenges in the years to come. Addressing these challenges, and addressing them soon, is going to require revamped and coordinated fiscal, monetary, and structural reform policies. The basic economic strategy underpinning Abenomics remains sound: it needs to be sustainable, flexible, and accelerated. The package has to be implemented  as a whole, in a way in which the policy elements mutually reinforce each other. 

Second, there needs to be a focus on rebuilding Japan’s macroeconomic policy space. As it stands, both fiscal policy and monetary policy are stretched—leaving limited room to respond to shocks. Fiscal policy should be supportive to protect near-term growth and promote inflation momentum. Beyond the short-run, a clear commitment to long-term fiscal sustainability is essential. Addressing uncertainty from fiscal sustainability could also help with growth and inflation over time. 

On monetary policy, the BoJ’s accommodative stance needs to continue to support reflation and growth. At the same time, financial sector oversight should be strengthened to mitigate rising financial stability risks. 

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Finally, reinvigorating the third arrow of Abenomics—structural reform—will be essential. Labor market reforms are the top priority – particularly to enhance worker productivity and the passthrough of demand stimulus to wages and prices. Importantly, under Abenomics, female participation in the labor market has increased—next, more training and career opportunities are needed for women to excel. Other key factors include broadening and deepening of corporate governance reform, further trade liberalization, and measures to unlock Japan’s immense productivity. 

Over the next 40 years, worsening demographics will slow Japan’s real GDP. Our analysis indicates that an ambitious and coordinated reform program can significantly mitigate this risk and, offset up to 15 percent of the real GDP slowdown.

Before I finish, let me take this opportunity for a small advertisement. Japan is ahead of other advanced economies in terms of demographic trends. Many look to Japan for lessons on how to handle their own demographic challenges. The staff at the IMF have invested significant time and effort to analyze the economic challenges of Japan’s changing demographics. These works are being collected into a book, which will be published in the new year. Please refer to the outline that was distributed earlier for a sneak preview of the topics that will be covered. 

With this, let me stop with these introductory comments and take any questions you may have.


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