Speech

Japan 2017 Article IV Press Conference Opening Remarks by David Lipton, IMF First Deputy Managing Director

June 19, 2017

Good afternoon. It’s a pleasure to be back in Tokyo.

Over the last few days, I met with Deputy Prime Minister Aso, Minister Kato, BoJ Governor Kuroda, FSA Commissioner Mori, and other senior officials. You have received a copy of our concluding statement so I will limit my remarks to our main findings.

This year’s Article IV Consultation—done in tandem with a comprehensive assessment of the financial sector, the so-called FSAP—focused on the opportunity afforded by current positive economic momentum to push forward with reforms under Abenomics and the new Work Style Reform agenda to secure sustained and inclusive growth, raise inflation, and achieve fiscal sustainability.

Under current policies, we expect growth of 1.3 percent this year and 0.6 percent in 2018. Inflation is likely to move upward slowly, but remain below the 2 percent target in the next few years. The financial sector remains stable, but banks and insurers face a challenging environment as low interest rates have reduced profitability and led to a search for higher yields—bringing new and less understood risks.

Given this context, we feel the best policy is to make the most of positive momentum and push ahead with needed reforms.

A well-coordinated reform package should combine continued fiscal and monetary support with structural reform, income policies, and steps to contain financial sector risks. Key elements should include:

• Labor market reforms to increase productivity and boost wages. Closing gaps between regular and non-regular workers, increasing mobility across firms, and “equal pay for equal work” are key to boosting overall wages.

• Measures to increase private investment and long term growth. Product and services market reforms, further corporate governance reform, and efforts to ensure credit is available to small and medium size firms can enhance investment and growth prospects.

• Measures to diversify and enhance labor supply. Further support for female and older workers and increased use of foreign labor are needed. This means eliminating disincentives to full-time work embedded in the tax and social security systems; increasing availability of childcare and nursing facilities, and reducing excessive overtime.

  Coordinated near-term monetary and fiscal support should combine with income policies.

• Monetary policy should maintain a sustained accommodative stance, and provide additional easing if downside risks materialize;

• The near-term fiscal stance should be at least broadly neutral in 2018, avoiding the scheduled withdrawal of fiscal stimulus. Steady medium-term fiscal consolidation is needed to contain public debt, and should move in line with evolution of the economy. The 2018 fiscal review is an important opportunity to set sound medium term fiscal targets and specific budget measures.

• Income policies—such as increasing administratively controlled wages and incentivizing private firms to raise wages—should complement and amplify monetary and fiscal support.

• Enhanced financial oversight and strengthened corporate governance among banks and insurers would help contain emerging risks. Crisis management and resolution frameworks could be strengthened; and dialogue should continue with financial institutions on how to adjust to macroeconomic and demographic trends.

This policy package needs to be implemented in a decisive and well coordinated manner. We see this is the best way to make substantive progress toward the government’s objectives.

Turning to the external position, while the 2016 current account balance was just moderately stronger than warranted by medium-term fundamentals and desirable policies, the real exchange rate appreciated substantially between 2015 and 2016, moving it to a level consistent with medium-term fundamentals. Ultimately, a strong and coordinated set of domestic policies is the best way to secure external balance over the medium term.

Let me stop with these introductory comments and take any questions you may have.