Decisive structural reforms offer key to restoring healthy growth in Japan

Author:Tim Callen
Position:IMF Asia and Pacific Department

Government's reform agenda. Implementing the reforms.


Page 290

The modest economic recovery that appeared to be under way in Japan in early 2000 in the context of the buoyant global economy has now given way to renewed weakness.While real GDP grew by 11/2 percent in 2000, the economy has slowed sharply this year as the high-tech-driven expansion succumbed to the U.S. and global electronics slowdown.

Industrial production and exports have fallen by 91/2 percent and 121/2 percent, respectively, over the past year (see chart, this page); equity prices have declined by 32 percent to 17-year lows; the unemployment rate has risen to 5 percent; and deflationary pressures have continued, with underlying consumer prices currently declining by around 3/4 of 1 percent (12-month basis) (see chart, page 292).

In the face of the weakening economy, the Bank of Japan (BoJ) introduced a new monetary policy framework in mid-March.Under this framework, a quantitative target is set for current account balances (broadly equivalent to bank reserves) at the central bank. The target was initially set at ¥5 trillion, which was sufficient to bring overnight interest rates down to zero, and was increased to ¥6 trillion in mid-August as deflationary trends intensified. The BoJ also announced that it would step up its purchases of long-dated government bonds (so-called rinban operations) to support this higher target. The central bank has indicated that this policy framework will remain in place until year-onyear changes in the consumer price index, excluding perishables, have risen to zero or above.

Despite this easing, short-term prospects are bleak. The staff 's current forecast sees the economy contracting by 0.2 percent in 2001, before returning to modest growth of 0.5 percent in 2002. But the downside risks are considerable. A slower than expected recovery in the U.S. economy and global electronics market, a further decline in equity prices, or a deterioration in consumer confidence could result in a deeper recession.

Indeed, concerns are mounting that Japan may reenter a cycle of slowing activity, rising bankruptcies, and a deteriorating banking system.


Government's reform agenda

Against this background, the new government of Prime Minister Junichiro Koizumi took office in April. Believing that "without structural reform, there can be no rebirth for Japan," the government has committed itself to addressing Japan's...

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