IMF Executive Board Concludes 2023 Article IV Consultation with Japan
March 30, 2023
Washington, DC: On March 22, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Japan.
The economy continues to recover driven by domestic demand while a weaker global economy has been weighing on external demand. Real GDP increased by 1.1 percent in 2022 and remains below the level in 2019 (on an annual basis). Private consumption led the recovery and private investment also rebounded. Industrial production recovered strongly during the summer as supply chain constraints due to lockdowns eased. Headline inflation has been above 2 percent y/y since April driven by external factors including the lagged effects of higher commodity prices and yen depreciation. The current account surplus has narrowed to 2.1 percent of GDP in 2022 due to a sharp rise in the value of commodity imports, and the external position in 2022 is assessed as broadly in line with medium-term fundamentals and desirable policies. The banking sector remains resilient, with capital adequacy and liquidity ratios above regulatory requirements, but interest and credit risks have increased.
The economic recovery is projected to continue in the near term amid pent-up demand, supply chain improvements, border reopening and policy support. Growth is expected to accelerate to 1.3 percent in 2023 driven by private consumption and business fixed investment. The output gap is projected to close in early 2023. Exports will rise as supply side constraints ease and inbound tourists return. Inflation is expected to rise further in early 2023 due to the delayed effect of yen depreciation and border reopening before declining again. The primary fiscal deficit will stay elevated in 2023 following the adoption of the October 2022 fiscal package. The current account surplus is projected to bounce to an average of 2.9 percent of GDP in 2023 driven by lower commodity prices and inbound tourism. An aging and declining population will continue to be a major macroeconomic challenge in the medium and long term.
While domestic risks are balanced, there are significant external downside risks. Downside risks to growth include: 1) deepening geo economic fragmentation and geopolitical tensions; 2) an abrupt slowdown of the global economy; 3) commodity price volatility; 4) natural disasters and 5) cyberthreats. In addition, there are risks to the economy that could arise from any abrupt change of the current monetary policy framework. Upside risks to growth include a more robust recovery of consumption, especially services, and a stronger-than-expected recovery of inbound tourism. As regards inflation, risks are two-sided, albeit with the upside more prominent in the short term.
Executive Board Assessment [2]
Executive Directors welcomed that the recovery would continue in the near term, supported by pent-up demand, supply chain improvements, border reopening, and policy support. Noting that the growth outlook is subject to significant external downside risks and longer-term structural challenges, Directors agreed that near-term policies should focus on achieving the two percent inflation target durably and preserving financial stability. At the same time, they stressed that medium-term policies should focus on reducing fiscal vulnerabilities and transitioning to a more dynamic, digitalized, green, and inclusive economy.
Directors stressed that growth-friendly fiscal consolidation is warranted to rebuild fiscal buffers and ensure debt sustainability, and it should be underpinned by a credible medium-term fiscal framework to reduce the primary deficit and put the debt-to-GDP ratio on a clear downward path. In this context, Directors emphasized that pandemic-related fiscal support should be withdrawn in a timely manner, and consolidation efforts should include both revenue and expenditure measures, including better targeted fiscal support to vulnerable households.
Directors broadly agreed that maintaining an accommodative monetary policy stance remains appropriate to achieve the two percent inflation target durably. Noting two-sided risks to inflation, many Directors encouraged the authorities to consider options for introducing more flexibility under the yield curve control framework to better manage those risks and help address the side effects of prolonged easing. Many Directors, however, stressed the need to avoid a premature exit from monetary easing and agreed with the authorities that maintaining the current monetary policy framework is appropriate. More broadly, Directors emphasized that any changes to monetary policy settings will need to be well communicated to facilitate smoother transitions and protect financial stability. They also underscored that the exchange rate should continue to act as the main shock absorber, limiting foreign exchange interventions to special circumstances, including disorderly market conditions.
Directors noted that, while the financial sector has been robust to several global headwinds this year, interest-rate and credit risks have increased and warrant close monitoring. They recommended considering appropriate implementation of macroprudential policies to curb financial vulnerabilities as they emerge.
Directors concurred that structural policies should help boost income growth, support startups, deepen digitalization, and achieve climate targets. They agreed that labor market policies should encourage more women and older persons to join the work force, reduce labor market duality, and improve mobility. Directors encouraged the Digital Agency to continue coordinating and implementing policies to digitalize the public sector. They emphasized that higher carbon pricing could help Japan achieve its climate-related targets in a growth-friendly way, and it should be accompanied by measures to protect the most vulnerable people and to enable an orderly transition from high-emission to low-carbon sectors.
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Table 1. Japan: Selected Economic Indicators, 2019–24 |
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|
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
|
|
Est. |
Proj. |
|||||
|
(In percent change) |
||||||
|
Growth |
||||||
|
Real GDP |
-0.4 |
-4.3 |
2.1 |
1.1 |
1.3 |
1.0 |
|
Domestic demand |
0.0 |
-3.4 |
1.1 |
1.7 |
1.5 |
1.0 |
|
Private consumption |
-0.6 |
-4.7 |
0.4 |
2.1 |
1.7 |
1.0 |
|
Gross Private Fixed Investment |
0.2 |
-5.4 |
0.4 |
0.8 |
2.5 |
2.0 |
|
Business investment |
-0.7 |
-4.9 |
0.8 |
1.9 |
3.1 |
2.4 |
|
Residential investment |
4.1 |
-7.9 |
-1.1 |
-4.7 |
-0.8 |
0.0 |
|
Government consumption |
1.9 |
2.4 |
3.5 |
1.5 |
0.1 |
0.5 |
|
Public investment |
1.9 |
3.4 |
-1.9 |
-7.1 |
1.4 |
0.4 |
|
Stockbuilding |
-0.1 |
-0.5 |
0.2 |
0.5 |
-0.1 |
0.0 |
|
Net exports |
-0.4 |
-0.8 |
1.0 |
-0.6 |
-0.1 |
0.0 |
|
Exports of goods and services |
-1.5 |
-11.6 |
11.7 |
4.9 |
4.0 |
1.9 |
|
Imports of goods and services |
1.0 |
-6.8 |
5.0 |
7.9 |
4.3 |
1.7 |
|
Output Gap |
0.7 |
-2.9 |
-1.6 |
-0.9 |
-0.1 |
0.2 |
|
(In percent change, period average) |
||||||
|
Inflation |
||||||
|
Headline CPI |
0.5 |
0.0 |
-0.2 |
2.5 |
2.7 |
2.2 |
|
GDP deflator |
0.6 |
0.9 |
-0.2 |
0.3 |
3.8 |
2.6 |
|
(In percent of GDP) |
||||||
|
Government |
||||||
|
Revenue |
34.2 |
35.5 |
36.6 |
36.2 |
35.7 |
35.4 |
|
Expenditure |
37.3 |
44.6 |
42.8 |
44.0 |
42.1 |
39.4 |
|
Overall Balance |
-3.0 |
-9.1 |
-6.2 |
-7.8 |
-6.4 |
-4.0 |
|
Primary balance |
-2.4 |
-8.4 |
-5.6 |
-7.5 |
-6.2 |
-3.8 |
|
Structural primary balance |
-2.6 |
-7.5 |
-5.6 |
-7.4 |
-6.2 |
-3.9 |
|
Public debt, gross |
236.4 |
258.7 |
255.4 |
261.3 |
258.2 |
256.3 |
|
(In percent change, end-of-period) |
||||||
|
Macro-financial |
||||||
|
Base money |
2.8 |
19.2 |
8.5 |
-5.6 |
2.3 |
3.8 |
|
Broad money |
2.1 |
7.4 |
2.9 |
2.7 |
5.5 |
4.0 |
|
Credit to the private sector |
3.2 |
6.1 |
1.8 |
4.6 |
2.4 |
2.0 |
|
Non-financial corporate debt in percent of GDP |
139.3 |
152.1 |
155.7 |
154.9 |
151.3 |
147.7 |
|
(In percent) |
||||||
|
Interest rate |
||||||
|
Overnight call rate, uncollateralized (end-of-period) |
-0.1 |
0.0 |
0.0 |
0.0 |
… |
… |
|
10-year JGB yield (end-of-period) |
0.0 |
0.0 |
0.1 |
0.4 |
… |
… |
|
|
|
|
|
|
|
|
|
(In billions of USD) |
||||||
|
Balance of payments |
||||||
|
Current account balance |
176.3 |
147.9 |
197.3 |
90.0 |
131.8 |
180.3 |
|
Percent of GDP |
3.4 |
2.9 |
3.9 |
2.1 |
3.0 |
4.0 |
|
Trade balance |
1.4 |
26.6 |
15.6 |
-117.8 |
-83.0 |
-25.6 |
|
Percent of GDP |
0.0 |
0.5 |
0.3 |
-2.8 |
-1.9 |
-0.6 |
|
Exports of goods, f.o.b. |
695.0 |
630.6 |
748.6 |
751.2 |
779.3 |
814.6 |
|
Imports of goods, f.o.b. |
693.6 |
604.0 |
732.9 |
869.1 |
862.3 |
840.2 |
|
Energy imports |
131.9 |
89.1 |
127.8 |
194.0 |
162.3 |
152.1 |
|
(In percent of GDP) |
||||||
|
FDI, net |
4.3 |
1.7 |
3.6 |
3.2 |
3.1 |
3.2 |
|
Portfolio Investment |
1.7 |
0.8 |
-4.0 |
-3.4 |
-0.7 |
-0.8 |
|
(In billions of USD) |
||||||
|
Change in reserves |
25.5 |
10.9 |
62.8 |
-47.4 |
11.5 |
11.5 |
|
Total reserves minus gold (in billions of US$) |
1286.3 |
1348.2 |
1356.2 |
1178.3 |
… |
… |
|
(In units, period average) |
||||||
|
Exchange rates |
||||||
|
Yen/dollar rate |
109.0 |
106.8 |
109.8 |
131.5 |
… |
… |
|
Yen/euro rate |
122.0 |
121.9 |
129.9 |
138.6 |
… |
… |
|
Real effective exchange rate (ULC-based, 2010=100) |
75.2 |
75.3 |
73.0 |
62.0 |
… |
… |
|
Real effective exchange rate (CPI-based, 2010=100) |
76.6 |
77.3 |
70.7 |
60.9 |
… |
… |
|
|
(In percent) |
|||||
|
Demographic Indicators |
||||||
|
Population Growth |
-0.2 |
-0.3 |
-0.3 |
-0.3 |
-0.4 |
-0.5 |
|
Old-age dependency |
47.6 |
48.3 |
48.7 |
48.9 |
49.3 |
49.8 |
|
Sources: Haver Analytics; OECD; Japanese authorities; and IMF staff estimates and projections. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
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