core sector communique

IMF Team Completes the 2011 Article IV Consultation Discussions with Japan

June 8, 2011

An International Monetary Fund (IMF) team, led by Mr. Mahmood Pradhan, Senior Advisor in the Asia and Pacific Department, visited Tokyo during May 30 - June 8 to conduct the annual Article IV discussions with Japan. The team met with senior officials from the government, the Bank of Japan (BoJ), and private sector representatives to discuss recent economic developments, the policy challenges ahead, and the impact of Japan’s policies on the rest of the world. The IMF's Acting Managing Director, Mr. John Lipsky, and the Director of the Asia and Pacific Department, Mr. Anoop Singh, joined the final policy discussions.

At the conclusion of the visit, the mission issued the following statement:

“Japan’s economy continues to face headwinds from the earthquake but should start to recover strongly in the second half of the year. The initial shock of the disaster was severe, but swift and decisive action by the government and the Bank of Japan helped to limit its impact on the economy. Starting in the summer, economic activity is expected to bounce back as supply constraints ease and reconstruction spending accelerates. The recovery is projected to continue in 2012, supported by exports and continued public spending. On this basis, we expect GDP growth to rise from minus 0.7 percent this year to 2.9 percent in 2012 with headline inflation remaining around zero percent in both years.

“Uncertainty surrounding the outlook is unusually large with the risks mainly on the downside. Delays in resolving supply disruptions and rebuilding electricity capacity could hold back private consumption and investment, while a slowdown in the advanced economies would weaken Japan’s exports. On the upside, a faster easing of supply constraints would give a lift to exports and investment.

“The immediate priority for policy is to repair damaged infrastructure and facilitate a swift recovery. Beyond steps already taken, timely passage of a second supplementary budget, which is well-targeted and focused on revitalizing the affected regions, and other related budget bills would help address downside risks and catalyze private spending. While other tax measures could also be considered, to limit bond issuance, financing of the budget could be supported by a moderate increase in the consumption tax in 2012 when a recovery is underway.

“Japan needs a more ambitious medium-term strategy for bringing down public debt to maintain confidence in public finances. Given the limited scope for cutting expenditures, the fiscal adjustment strategy should rely on comprehensive tax reforms centered on a gradual increase in the consumption tax. Adopting an explicit fiscal rule based on a primary surplus and debt target would help sustain fiscal consolidation and strengthen credibility.

“The Bank of Japan’s (BoJ) accommodative monetary stance has also helped stabilize financial markets. Although headline inflation has risen, subdued demand and heightened uncertainty about the outlook could add to deflation pressures. Accelerating and expanding BoJ’s asset purchase program could guard against deflation risks and support the recovery. To strengthen communication in a period of volatile prices, the BoJ could also convey its policy stance by explaining more the outlook for measures of inflation that exclude both food and energy.

“Financial policies should protect against risks of an economic slowdown and higher market volatility. A delayed recovery could raise banks’ credit costs, especially for loans to smaller firms. Banks also face risks from their large holdings of equities and government bonds. To strengthen the resilience of the financial system, supervisors should encourage weak banks to improve their capital base and take early action against distressed borrowers. A Financial Sector Assessment Program (FSAP) Update in the coming year will provide an opportunity to explore the impact of new global regulatory measures, as well as broader issues related to financial stability and policies to improve financial intermediation.

“Timely implementation of the government’s growth strategy would also help sustain fiscal adjustment and support the recovery. Priority should be given to expanding employment opportunities for women, youth, and the elderly and raising productivity by promoting further regional trade integration, such as through the proposed Trans Pacific Partnership (TPP), which could open new export markets and spur reforms of services and agriculture.

“Comprehensive fiscal and structural reforms in Japan would also benefit the rest of the world. Lower public debt would contribute to stability in government bond markets and provide savings to reduce global interest rates, while growth-enhancing reforms would strengthen global demand.

“Finally, despite the adversity caused by the earthquake, Japan has enacted swiftly the bill to contribute to the replenishment of capital of the International Development Association (IDA) of the World Bank and other multilateral development banks, as well as the quota increases of the IMF. This exemplifies Japan’s continued strong commitment to international cooperation. We also welcome the announcement that Japan will host the 2012 Annual Meetings of the IMF and the World Bank Group in Tokyo, in October 2012.”