Japan: Ramping up Policy Actions for Lasting Economic Change

SUMMARY

Abenomics has lifted Japan out of the doldrums, but policies need to be reinforced to end the lingering deflationary mindset, raise growth, restore fiscal sustainability, and maintain financial stability without undue reliance on yen depreciation.

 
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  • Japan’s prospects improved, but stronger structural reforms critical to meet long-term challenges
  • Need for balanced, credible fiscal consolidation, while supporting growth
  • Complement further monetary easing by more market guidance, communication.
  • The IMF report found that Abenomics’ three-pronged strategy of aggressive monetary easing, flexible fiscal policy, and structural reforms constituted a clear break from previous incremental efforts. But, despite initial positive results, the pace of real GDP growth has remained at about 1 percent—similar to the post-bubble period—and deflation risks remain.

    “This is partly due to external shocks, including slower global growth, and the collapse in commodity prices” said Kalpana Kochhar, Deputy Director in the IMF’s Asia and Pacific Department, and head of the mission that conducted the assessment.

    In addition, the negative impact of the consumption tax rate hike in 2014 lasted longer than expected, but structural impediments have also played a role, including sluggish wage growth, production increasingly moving to other countries through foreign direct investment, and headwinds from an aging and declining population.

    Recovery underway but momentum still fragile

    The economy is projected to grow by 0.8 and 1.2 percent in 2015 and 2016, provided higher real wages support consumption, and business investment rises on the back of lower production costs from declining oil prices, record-high corporate profits, ongoing corporate governance reforms, and the abundant availability of credit.

    “However, risks are elevated and clearly to the downside, including from a disappointing outcome of the Shunto wage negotiations, and weaker spending of the oil windfall,” said Kochhar.

    Japan also faces short-term risks from lower-than-expected growth in China and the United States, and possible yen appreciation in the event of global financial turbulence given its status as a safe-haven currency.

    “Over the medium term, weak domestic demand, and incomplete fiscal and structural reforms could result in stagnation, and doubts about fiscal sustainability” added Luc Everaert, Head of the Japan Division in the IMF’s Asia and Pacific Department.

    The report suggests accelerating structural reforms is the only effective policy lever to address these downside risks, and maintain confidence in Abenomics.

    Wanted: stronger structural reforms

    Structural reforms have progressed in a number of areas. Female labor force...

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