©2014 International Monetary Fund
IMF Country Report No. 14/236
JAPAN
2014 ARTICLE IV CONSULTATION—STAFF REPORT; AND
PRESS RELEASE
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with
members, usually every year. In the context of the 2014 Article IV consultation with Japan, the
following documents have been released and are included in this package:
• The
Staff Report prepared by a staff team of the IMF for the Executive Board’s
consideration on July 23, 2014, following discussions that ended on May 30, 2014, with
the officials of Japan on economic developments and policies. Based on information
available at the time of these discussions, the staff report was completed on July 3, 2014.
• An
Informational Annex prepared by the IMF.
• A
Staff Statement of July 23, 2014 updating information on recent developments.
• A
Press Release summarizing the views of the Executive Board as expressed during its
July 23, 2014 consideration of the staff report that concluded the Article IV consultation
with Japan.
The publication policy for staff reports and other documents allows for the deletion of market-
sensitive information.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
PO Box 92780 • Washington, D.C. 20090
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Price: $18.00 per printed copy
International Monetary Fund
Washington, D.C.
July 2014
JAPAN
STAFF REPORT FOR THE 2014 ARTICLE IV CONSULTATION
KEY ISSUES
Abenomics is gaining traction, but progress across the three arrows has been uneven and
medium-term risks remain substantial. Inflation has risen, a consumption tax increase has been
implemented, and there are signs of a transition to private-led growth. However, structural
reforms have progressed slowly and a medium-term fiscal plan beyond 2015 is still to be
articulated. Uncertainty is therefore high whether the recovery and exit from deflation will become
self sustained under current policies.
More forceful growth reforms are needed to overcome structural headwinds to raising
growth and ending deflation The next round of structural reforms should lift labor supply,
reduce labor market duality, enhance risk capital provision, and accelerate agricultural and
services sector deregulation. Corporate governance reforms already underway could help reduce
firms’ preference for large cash holdings.
A concrete medium-term fiscal reform plan is urgently needed. Given very high levels of
public debt, implementation of the second consumption tax increase is critical to establish a track
record of fiscal discipline. Adoption of a concrete medium-term fiscal consolidation plan
beyond 2015 would build confidence in the sustainability of public finances and allow more
flexibility to respond to downside risks. Plans to lower the corporate tax rate have growth benefits,
but should proceed in combination with measures to offset revenue losses and be consistent with
plans to restore fiscal sustainability.
Monetary policy is appropriately accommodative. With inflation and inflation expectations
increasing, no further easing is needed at this point. In case downside risks to the inflation
outlook materialize, the Bank of Japan (BoJ) should act swiftly through further and/or longer-
dated asset purchases. Communication should focus on achieving 2 percent inflation
in a stable
manner aided by a more transparent presentation of the BoJ’s forecast and underlying
assumptions.
The financial sector remains stable. Portfolio rebalancing by financial institutions and investors
is desirable but also raises new risks, including from greater overseas engagement. In regional
banks, limited growth opportunities and low net interest margins could further undermine core
profitability and weaken capital buffers. Supervisors should continue to be proactive in monitoring
these risks.
Japan’s external position is assessed as broadly in balance—compared to moderately
undervalued last year—because of structural changes in the external sector, including from the
offshoring of production and sustained high energy imports, which have become more apparent.
Launching all three arrows will create benefits for the region and the global economy.
Spillovers via the trade channel and capital flows are expected to increase in coming years with
uncertain net effects—higher exports and capital outflows—in the short term. As long as Japan
continues to proceed with its reforms, incomes will rise and fiscal risks decline, which will be
positive for the global economy.
July 3, 2014
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Approved By
Jerry Schiff and
Tamim Bayoumi
Discussions took place in Tokyo from May 19–30, 2014. The staff team
comprised J. Schiff (head), S. Danninger, D. Botman, M. Nabar, J. Kang,
I. Saito (all APD), S. Arslanalp (MCM), R. de Mooij (FAD), and G. Ganelli
and C. Aoyagi (OAP). Mr. Faruqee (RES) join for spillover discussions.
Messrs. Momma, Hishikawa and Masuhara (OED) also participated in the
discussions. Messrs. Lipton and Rhee held meetings with senior officials.
Ms. Abebe and Mr. Ramirez assisted in this report’s preparation. The
mission was assisted by OAP staff.
CONTENTS
BACKGROUND AND CONTEXT __________________________________________________________________ 4
ABENOMICS: GAINING TRACTION BUT RISKS REMAIN ________________________________________ 5
A. Recent Developments ___________________________________________________________________________ 5
B. Outlook and Risks _______________________________________________________________________________ 6
GROWTH REFORMS VITAL TO ABENOMICS’ SUCCESS _______________________________________ 10
MAINTAINING FOCUS ON FISCAL SUSTAINABILITY _________________________________________ 14
MONETARY POLICY: STAYING THE COURSE __________________________________________________ 18
THE EXTERNAL POSITION AND SPILLOVERS _________________________________________________ 21
A. External Sector Assessment ___________________________________________________________________ 22
B. Spillovers ______________________________________________________________________________________ 22
FINANCIAL SECTOR: REBALANCING RISKS ___________________________________________________ 24
STAFF APPRAISAL ______________________________________________________________________________ 25
BOXES
1. Structural Impediments to Private-Sector Led Growth __________________________________________ 8
2. Facilitating (Risk) Capital _______________________________________________________________________ 12
3. Unstash Japan’s Corporate Cash _______________________________________________________________ 13
4. Reforming the Corporate Income Tax System _________________________________________________ 17
5. Portfolio Rebalancing and Capital Outflows? __________________________________________________ 19
FIGURES
1. Economic Developments and Outlook ________________________________________________________ 27
2. External Developments ________________________________________________________________________ 28
3. Monetary Policy Transmission _________________________________________________________________ 29
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4. Financial Markets Developments ______________________________________________________________ 30
5. Corporate Sector Developments ______________________________________________________________ 31
6. Inflation and Inflation Expectations ____________________________________________________________ 32
7. Labor and Wages ______________________________________________________________________________ 33
8. Fiscal Developments and Tax Reform _________________________________________________________ 34
TABLES
1. Selected Economic Indicators, 2009–15 _______________________________________________________ 35
2. General Government Operations, 2010–15 ____________________________________________________ 36
3. External Sector Summary, 2008–19 ____________________________________________________________ 37
4. Medium-Term Projections, 2012–19 ___________________________________________________________ 38
5. FSIs for Deposit-taking Institutions: All Banks _________________________________________________ 39
ANNEXES
I. New Growth Strategy and Status of Structural Reforms _______________________________________ 40
II. Risk Assessment Matrix ________________________________________________________________________ 42
III. Assessment of Japan’s External Sector ________________________________________________________ 43
IV. Main Recommendations of the 2013 Article IV Consultation _________________________________ 45
V. Debt Sustainability Analysis ___________________________________________________________________ 46
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BACKGROUND AND CONTEXT
1. About one and half years ago Japan adopted a new economic revival plan dubbed the
“three arrows of Abenomics”. The three-pronged strategy combines aggressive monetary easing,
flexible fiscal policy, and structural reforms to end decades’ long deflation, raise growth, and lower
public debt.
2. Since then, economic policies progressed along several dimensions.
➢
Arrow I—aggressive monetary easing has continued as planned. Asset purchases under the BoJ’s
Quantitative and Qualitative Monetary Easing (QQE) program are being executed at the planned
pace and the BoJ’s balance sheet grew to 52 percent of GDP by end-May 2014. Policy Board
members have maintained their forecast of reaching 2 percent inflation in or around fiscal
year 2015, which is considered a key marker towards achieving the BoJ’s price stability target of
2 percent inflation in a stable manner.
➢
Arrow II—fiscal policy has shifted from stimulus to revenue policy. After adopting two stimulus
packages in early 2013 and 2014, discussions have turned to tax reform. With a higher
consumption tax rate of 8 percent in place, attention has shifted to the next planned increase, to
10 percent, in October 2015. A decision is expected by the end of this year and will take into
account various factors, including economic performance in the third quarter. The government is
also reviewing options for reducing the corporate income tax (CIT) rate to stimulate investment.
The size of the rate cut and offsetting measures have yet to be determined.
➢
Arrow III––gradual albeit limited progress on structural reforms (Annex I). Discussions since the
fall of 2013 led to a few concrete outcomes. Reforms that are being implemented include an
electricity sector reform, a bill to encourage farmland consolidation, governance and investment
reforms at the Government Pension Investment Fund (GPIF), and the adoption of a corporate
Stewardship Code. Large areas of Japan, including Tokyo, have recently been designated as
Special Economic Zones (SEZs) with concrete reform plans yet to be announced. Finally, progress
on labor market reforms has been limited with the exception of raising the number of childcare
facilities to facilitate the employment of women. On June 24, the government unveiled an
update of its growth strategy, which includes plans to lower the corporate income tax rate and
additional corporate governance reforms among other measures (Annex I).
3. The political environment for further reform remains favorable with about two years
left until the next scheduled national elections. The ruling coalition enjoys large majorities in
both Houses of the Diet. Prime Minister Abe’s approval rating has declined, but remains relatively
high at around 50 percent.
4. For Abenomics to succeed, reforms need to be comprehensive and sustained for an
extended period. This would help secure the new inflation target and generate powerful synergies
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5
to overcome structural headwinds from a shrinking labor force and a large fiscal adjustment need.
This year’s policy discussions focused on how to solidify Abenomics’ early gains.
ABENOMICS: GAINING TRACTION BUT RISKS REMAIN
A. Recent Developments
5. After a brief slowdown, growth rebounded sharply in early 2014 (Figure 1)
. GDP growth
accelerated to 6.7 percent (q/q, saar) in the first quarter of 2014, exceeding market expectations by a
wide margin. The two main drivers were strong rush demand ahead of the consumption tax increase
and a sharp rise in private nonresidential
investment. Net exports remained a drag on
growth.
➢
Private consumption. Last-minute consumer
spending ahead of the April 1 consumption
tax rate increase lifted private consumption
growth to 9.2 percent (q/q, saar). The
acceleration was similar in magnitude to the
pick up of demand ahead of the 1997 tax
increase (from 3 to 5 percent). High frequency
data indicate that private consumption
declined in April, broadly as expected.
➢
Business investment expanded substantially faster than projected. Private nonresidential
investment grew by 34.2 percent (q/q, saar) in the first quarter, the second highest pace
since the bubble burst in early 1990s. Staff estimates that ¼ to ⅓ of the increase could be
related to temporary factors1, with the remaining part related to fundamentals: high corporate
profitability, an aging capital stock––more than 16 years on average in manufacturing sector—
and rapidly rising capacity utilization.
➢
Exports recovered slower than expected given the yen depreciation and external demand when
benchmarked against an empirical model for export growth (Figure 2). Customs trade data2
show that real exports of goods declined by 1.0 percent (q/q, sa) in the first quarter, mainly
because of weak external demand, but also because of limited passthrough of the depreciation
to export prices in local currencies and competitiveness problems in the external sector
(Appendix III).
1 Institutions which are not obliged to charge consumption tax on their services (such as financial sector institutions,
hospitals, and small firms) frontloaded purchases of investment goods on which they pay consumption tax.
2 Because of changes in the BOP statistics, national accounts data on exports and imports in the first quarter of 2014
are not comparable with data from 2013 (Table 1).
94
96
98
100
102
104
106
94
96
98
100
102
104
106
t-6
t-5
t-4
t-3
t-2
t-1
t
2014
1997
Japan: Synthetic Real Consumption
(Monthly index; t-6 = 100)
Source: Cabinet Office / Haver Analytics.
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➢
Imports, on the other hand, were pushed up by demand for consumer items ahead of the
consumption tax increase (e.g. tablets, smartphones) and grew by 4.6 percent in the first quarter
(q/q, sa).3 This trend reversed in April, when imports declined sharply (9.9 percent, m/m, sa) in
line with declining consumption.
➢
Labor markets tightened and capacity constraints started to bind. Excess capacity has shrunk to
pre-2008 levels and the unemployment rate declined to 3.5 percent in May with labor shortages
particularly acute in construction, health and hospitality services
.
6. Capital and foreign exchange markets have been relatively stable this year. As a result
of the BoJ’s aggressive asset purchases, Japanese government bonds (JGBs) yield remained near
historic lows of 60–65 basis points for 10-year bonds. Negative real lending rates aided a notable
pickup in bank lending, including to small and medium-size enterprises (SMEs) (Figure 3). After
rising 57 percent in 2013, equity markets have moderated somewhat (about 7¼ percent) and the
real effective exchange rate (REER) has been broadly unchanged since the beginning of the year
(Figure 4).
B. Outlook and Risks
7. After a brief contraction, growth is expected to return to a moderate yet still above-
potential pace later this year. An uneven quarterly growth profile reflects the advancing of
domestic demand in the first quarter and a corresponding payback in the second quarter
(-3.7 percent q/q, saar). The baseline assumes a return to moderate growth in the second half of the
year, with a gradual handoff from stimulus to private sector-led growth. GDP is projected to grow
1.6 percent in 2014 for the year as a whole before decelerating to 1.1 percent in 2015 on unwinding
fiscal stimulus (Table 1).
➢
Business investment is forecast to contribute more than 1 percent to GDP growth in 2014.
Cyclical factors are providing a push for the recovery, including from tight capacity constraints—
businesses report capacity utilization near pre-2008 levels (Tankan survey)—and tax incentives
for replacing old capital stock. In addition, structural factors, including healthy corporate balance
sheets and improved business growth expectations (Cabinet Office survey), provide a fertile
ground for a continuation of investment spending (Figure 5).3
➢
Private consumption is expected to slow substantially in the second half of the year contributing
0.4 percent to GDP growth this year. Real incomes are forecast to decline moderately as the
effects of higher inflation—2¾ percent in 2014 due to the tax increase—is mostly offset by
nominal labor income growth of about 2½ percent.4 A decline in the savings rate by
3 See J. S. Kang (2014), “Balance Sheet Repair and Corporate Investment in Japan”, draft IMF Working Paper.
4 Nominal labor income growth of 2.5 percent comprises (i) a 1 percent increase from overtime pay, bonuses; (ii) a
first rise in base wages of 0.5 percent for regular workers in several years; and (iii) employment ground of 0.5 percent.
The reversal of a 10 percent public sector wage cut after the earthquake adds another 0.4 percent.
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7
0.5 percentage point, similar to experiences in other countries following VAT tax rate increases,
is expected to sustain consumption in the second half of the year.
➢
Exports are forecast to grow moderately this year, supported by improving global growth and
benefitting from a delayed response to the yen depreciation since late 2012. Historically, Japan’s
trade balance has started to improve about 1–1½ years after a large depreciation.
8. Under the baseline, potential growth will increase modestly over the medium term.
Structural bottlenecks pose an impediment to a sustained recovery (Box 1). With labor supply
declining as a result of demographic changes and structural rigidities constraining productivity
growth and labor reallocation, potential growth is currently estimated at about ½ percent. The
investment recovery and some benefits from structural reforms, including from raising female labor
supply and deregulation, is estimated to increase potential growth to 1 percent over the medium
term.5 An ambitious push on structural reforms and the effect of ending deflation on private
initiative pose upside risks.
9. Inflation is projected to reach 2 percent over the medium term and interest rates are
expected to rise slowly. Headline and core inflation excluding food and energy, have risen to
about 1.7 and 0.7 percent in April (y/y), respectively, excluding the effects of the consumption tax
increase. Price increases are still related to last
year’s large depreciation, although inflation of
non-tradable items has begun to rise recently
(Figure 6). Because of the consumption tax
increase, headline inflation is projected to
temporarily rise to an annual average rate of
2.8 percent in 2014, assuming full pass-through
of the tax increase to final prices.6 Underlying
inflation is projected to slow temporarily—and
is forecast at 1.1 percent this year—as the pass-
through from the yen depreciation comes to an
end. With the output gap—estimated at about
-1 percent in 2014—closing steadily and inflation expectations rising, inflation is projected to
increase to 2 percent by 2017 (Table 4).7 Because of rising inflation expectations, long-term interest
5 Potential growth estimates are based on a production function approach. The projected increase in potential
growth by 0.5 percent comprises the net effect of a rise in the capital stock (0.6 percent) modest productivity
improvements (0.1 percent) and a declining contribution from labor (0.2 percent).
6 In April, headline CPI rose to 3.4 percent (y/y) from 1.6 percent in March, broadly consistent with full pass-through.
7 Staff’s forecast is based on an estimated expectations-augmented Philips curve, using quarterly data over q1-1981
to q3-2013 with inflation expectations, the output gap, crude oil price index, and corporate goods inflation (to
capture cost-push factors) as the main determinants. The effects from higher inflation expectations are uncertain but
correlations between long-term inflation expectations and actual inflation could be substantial. In 2005 correlations
ranged between 0.6 and 0.75, depending on the measure of inflation (headline, core, core-core).
-1
0
1
2
3
4
-1
0
1
2
3
4
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Headline
Core (ex. Food)
Core-Core (ex. Food & Energy)
Headline (ex. Consumption Tax (CT))
Core (ex. CT)
Core-Core (ex. CT)
Year on Year Inflation
(In percent)
Source: Cabinet Office / Haver Analytics
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rates are expected to gradually increase over the medium-term, but are flat in the near-term as a
result of QQE.
Box 1. Structural Impediments to Private-Sector Led Growth1
The foundations for private-sector led growth
and a durable exit from deflation remain
uncertain. Because of further declines in the
working-age population (text chart), staff projects
potential growth not to increase above the pre-
earthquake level of 1 percent by 2017 despite rising
private investment and steady productivity growth.
Headwinds from various structural factors hold
back the recovery in staff’s baseline.
➢
Structural impediments to wage growth
include the rising share of non-regular and part-time workers, particularly in the services sector, with less
bargaining power, productivity growth, and lower wage levels (text chart). Low horizontal mobility of
regular workers between firms amid high mobility within firms has mitigated the effects of a tight labor
market on wages.
➢
Impediments to investment2 include the weak
SME sector, which accounts for nearly 70 percent
of total employment and over half of
manufacturing value-added, but may not have
benefitted from Abenomics due to rising import
costs. Population aging is dampening prospects
for future demand growth—a key determinant
for domestic investment.
➢
Displacement of exports. Sales of Japanese
subsidiaries are now exceeding exports from Japan. This trend is likely to persist under Abenomics, and
will likely mean slower export growth. With rising incomes in regional trading partners, demand for
commodities and consumer durables and services is expected to grow relative to investment goods,
where Japan has had a comparative advantage.
➢
Greater import penetration in markets where Japan used to have strong competitiveness, such as
electrical machinery, raises concerns that Japanese firms have structurally lost competitiveness.
➢
Higher energy costs. High imports of natural gas since 2011, which have been a major reason for the
weaker trade balance, could affect competitiveness and spur a further movement of production abroad.
1 Prepared by J. S. Kang (APD).
2 See J. S. Kang (2014), “Balance Sheet Repair and Corporate Investment in Japan”, draft IMF Working Paper.
27
29
31
33
35
37
-3
-2
-1
0
1
2
2001
2003
2005
2007
2009
2011
2013
Change in part-time wages
Composition effect
Change in full-time wages
Share of non-regular workers (RHS)
Source: Haver Analytics, IMF staff estimates
Rising share of non-regular workers drags wage growth
(%, YoY)
(% of staff)
2012
2015
2018
2021
2024
2027
2030
2033
2036
2039
2042
-10
-8
-6
-4
-2
0
2
4
6
8
10
50
100
150
200
250
300
1950
1965
1980
1995
2010
2025
2040
2055
2070
2085
2100
Japan: impact of aging on the level of real GDP (RHS, green x-axis)
FRA (LHS)
DEU (LHS)
JPN (LHS)
GBR (LHS)
USA (LHS)
Working-age Population, 1950-2050
(Index, 1950=100)
(Real GDP level change)
Source: U.N. and Anderson, Botman, and Hunt (2014), "Aging and Deflation", IMF WP forthcoming.
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9
10. Near-term risks to the outlook are balanced, but the sustainability of the recovery over
the medium term is at risk (Annex II).
➢
Near term. On the domestic side, the start of a positive investment-inventory cycle could raise
demand and lift growth above staff’s baseline in the short term. Also, public investment
spending has been constrained by absorption capacity and could grow faster than expected if
access to (foreign) labor improves. These risks are broadly offset by the possibility of a sharper-
than-expected moderation of growth in China or among ASEAN countries. This could lead to
negative inward spillovers, which would affect Japan more strongly than other advanced
economies (directly or via spillbacks) given its supply chain linkages and through its role as a
supplier of capital goods (2013 and 2014 Spillover Reports). Geopolitical risks, including in
Ukraine, could raise energy prices and adversely affect businesses.
➢
Medium term. Substantial uncertainty remains as to whether higher growth and inflation can be
sustained over the longer term. Fiscal consolidation needs to proceed for a long time and the
impact on growth could be larger than in the baseline. Together with a failure to implement
high-impact structural reforms, this could erode confidence and limit gains in potential growth.
As growth falls back and inflation momentum weakens, monetary policy could become
overburdened and, with increasingly limited ability for policies to restore fiscal sustainability, the
risk premium on government securities could rise (see “incomplete Abenomics” 2013 IMF Staff
Report). Given the large JGB holdings by the financial sector, this would pose substantial
financial stability risks. Such an outcome would have important spillovers via reduced demand
for imports and tighter financing conditions in Japan and overseas (See Box 1.5 in the 2014
Regional Economic Outlook for Asia and Pacific). A sudden spike in bond yields remains the
main tail risk over the medium term.
In the event downside risks emerge, the government should continue with fiscal reforms, but in
order to restore growth, inflation, and confidence in Abenomics, monetary and structural policies
should respond. The scope for additional fiscal stimulus is limited in the absence of a concrete
medium-term fiscal strategy beyond 2015. In a tail event of a widespread loss of faith in the
sustainability of public finances, further fiscal consolidation would be needed to forestall a rise in
risk premia and interest rates.
The Authorities’ Views
11. The authorities emphasized that the economy appears well positioned to weather the
consumption tax increase. They highlighted that fiscal stimulus spending would be frontloaded,
limiting the growth slowdown beginning in the second quarter. They noted that the rise in base
wages and bonuses would support sentiment and domestic demand over the coming period. The
authorities broadly shared staff’s risk assessment but noted that many businesses were already
anticipating slower growth in China and had begun to adjust their investment and expansion plans
accordingly.
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12. The BoJ expected a faster rise of inflation in the near term than staff. Like staff, they
anticipated that inflation would stay around 1¼ percent for some time due to the waning effects of
last year’s yen depreciation. However, they expected inflation to rise again in the second half of this
fiscal year as the narrowing of the output gap would exert upward price pressure while inflation
expectations would be pushed up further with the increase in actual inflation. They also saw the
rapid labor market tightening and rising capacity utilization rates amid sluggish potential growth as
signs that the output gap was already broadly closed. Regarding risks, the BoJ suggested the
possibility that price stability may come in sight before potential growth picks up, highlighting the
importance of accelerating the pace of structural reforms.
GROWTH REFORMS VITAL TO ABENOMICS’ SUCCESS
13. Structural reforms hold
the key for faster growth.
Measures to raise labor supply
and employment would directly
offset the drag on growth from
an aging-related decline in the
labor force. A more flexible
economy would further
encourage investment and
productivity growth. Such a
comprehensive reform program,
by lifting confidence, would
stimulate demand already in the
near term and improve
monetary policy transmission.
Policy Issues and Staff’s Views
14. The government adopted a revised growth strategy in June, but left many details
undefined. Flagship reforms include plans to reduce the corporate income tax rate from over
35 percent to below 30 percent with the exact size of the cut, timeframe, and financing to be
determined. Other important measures—some of which also lack specific timeframes— are further
corporate governance reforms to encourage a more productive use of corporate savings and labor
market reforms by possibly removing tax disincentives for women to work, greater use of foreign
labor in health and household services, and measures to incentivize a shift from overtime- to
performance-based remuneration. Few concrete measures were announced on agricultural reform
or the role of SEZs.
15. Since last year, reforms are progressing in a number of areas, but more forceful
measures are needed to tackle growth impediments. While assessing the growth impact of
structural reforms is inherently difficult, staff estimates that ongoing reforms could help lift potential
2.5
1.25
1.25
1.25
1.6
1.6
2.4
1.6
2.5
2.5
H
H
H
H
L
L
L
L
H
H
0
5
Female labor participation
Foreign labor
Reducing Labor Duality
Trade negotiations (TPP)
Special Economic Zones
Agricultural reform
Electricity sector reform
Corporate taxation
Corporate governance
reform
Financial sector reform
Japan's Structural Reforms: Potential Direct Impact and Progress /1
Expected economic impact (Progress x Potential direct impact) 2/
Potential direct economic impact (H=High; L=Low)
Sources: Staff estimates; See Annex 1.
1/ Direct impact refers to macroeconomic growth effect, excluding potential spillovers or synergies from complementary reforms.
2/ Progress assessed as likelihood of full reform implementation (25, 50, 75, or 100 percent)
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growth to around 1 percent. But in order to raise trend growth above 1 percent, more ambitious
reforms are needed in addition to implementing announced plans.
16. Additional measures that would be needed include:
➢
Raising the employment of women, older workers, and foreign labor. Fully implementing plans to
increase the availability of child care, gradually raising the retirement age, and relaxing
immigration restrictions in areas with labor shortages could raise labor supply. Another
important area is addressing labor market duality between regular and non-regular workers
which contributes to subpar productivity growth because the time-limited and less protected
contracts for non-regular workers lead to reduced training and effort. Encouraging the use of
modified labor contracts to bridge this gap would stimulate productivity growth and increase
the pass-through of labor market tightness into higher wages (Figure 7).8
➢
Enhancing risk capital provision (Box 2). Measures should focus on increasing credit to new
growth projects, for instance, by improving lenders’ access to credit registries, encouraging
more asset based lending, and removing barriers to entry and exit of SMEs. Revisions to GPIF‘s
investment strategy would provide further risk capital and lead to changes in investment
strategies among other institutional investors. The introduction of individual savings accounts
has been a positive step. Consideration could be given to extending the 5-year term limit and
gradually raising the maximum contribution limit.
➢
Implementing comprehensive corporate governance reform (Box 3). Complementing the recently
introduced Stewardship Code for institutional investors with a corporate governance code for
firms and introducing measures to expand the use of independent outside directors would
strengthen firms’ governance and potentially unlock corporate savings for more growth-
effective use.
➢
Deregulating agriculture and domestic services sectors to raise productivity and encourage inward
foreign investment.9 In this regard, early guidance on the modus operandi in the recently
designated special zones could reduce uncertainty and boost investment.
➢
Benefits from a Trans-Pacific Partnership agreement could be substantial, provided it will
eliminate most tariffs and non-tariff and investment barriers in Japan—with growth gaining
about 0.2 percent per year.10
8 See C. Aoyagi and G. Ganelli (2013), “The Path to Higher Growth: Does Revamping Japan’s Dual Labor Market
Matter?”, IMF Working Paper 13/202.
9 Staff analysis using prefectural data suggests that land consolidation could increase long-term productivity by up to
30 percent, although the sector as a whole accounts for only 1 percent of GDP.
10 See P. A. Petri, M. G. Plummer, and F. Zhai (2012), “The Trans-Pacific Partnership and Asia-Pacific Integration: A
Quantitative Assessment”, Peterson Institute for International Economics and East-West Center.
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Box 2. Facilitating (Risk) Capital1
The authorities have taken a number of steps to strengthen the financial sector’s ability to provide
risk capital to the economy and facilitate more portfolio rebalancing abroad. The launch of tax-free
investment savings accounts (NISA) encourages Japanese households—with more than US$16 trillion in
financial assets—to put more savings into stocks and investment trusts. The extension of BoJ facilities
stimulates bank lending and supports economic growth, while establishing a new ROE-focused index (JPX
Nikkei 400) encourages a greater focus on corporate governance and profitability.
Additional policy efforts should focus on intermediation (securitization and venture capital) and
facilitate take-up on the demand side (exit and entry, corporate restructuring). Specifically:
➢
Securitization. There is room for boosting securitization activity backed by small business loans,
possibly by encouraging more information
sharing across multiple credit registries on
repayment and default history of individual
firms and by further easing terms on BoJ
facilities (lower funding costs, longer maturity
loans) for asset-backed lending.
➢
Venture capital firms have typically been less
prominent in Japan than in other OECD
countries (Nabar and Syed, 2011). Together with
improvements in the GPIF governance structure,
a further shift in targets toward riskier assets,
such as venture capital could spur faster growth in funding for new businesses (as was seen in the US
with the 1979 reform of the Employment Retirement Income Security Act allowing pension funds to
invest in high risk assets including venture capital).
➢
Restructuring and exit of nonviable SMEs. Entry and exit rates of SMEs in Japan are on average about
a third of those in advanced countries (Lam and Shin, 2012). The persistence of nonviable firms, kept
afloat in part by credit guarantees, supervisory forbearance, and restructured loans impedes credit
intermediation and risk taking in several ways—by deterring entry of new firms, expansion of healthy
firms, and by eroding risk assessment capabilities at banks. Achieving turnover rates that reflect
underlying fundamentals would require encouraging more out-of-court voluntary workouts to minimize
stigma associated with bankruptcy and consolidating regional banks whose capital buffers are weakened
if they were to call in non-performing loans. At the same time, small business entry could be facilitated
by reducing the time and cost of starting businesses—streamlining business registration procedures and
upgrading credit registries and personal credit information.
1 Prepared by S. Arslanalp (MCM) and M. Nabar (APD).
0
0.5
1
1.5
2
0
0.5
1
1.5
2
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
RMBS
CMBS
CDO
Leases
Consumer Loans
Shopping Credits
Sales Receivables / Commercial Bills
Others
Source: Japan Securities Dealers Association, CEIC, and Staff Estimates
Securitization Products Issuance by Underlying Assets
(In percent of GDP)
JAPAN
INTERNATIONAL MONETARY FUND
13
The Authorities’ Views
17. The authorities emphasized that a broad range of growth reforms is in train. The
number of childcare facilities was rapidly expanding and measures to improve corporate governance
showed early success with the adoption of the Stewardship Code by many financial institutions. They
further highlighted that the measures taken so far have the potential to deliver significant growth
payoffs. Already it was possible to see an impact on corporate profitability and base wages are
going up for the first time in 15 years. They anticipated that the measures in the new growth
strategy would add further support to private sector-led growth through additional concrete
measures, but felt that the full impact of the structural reforms is likely to take a while to materialize
and gains in potential growth were difficult to quantify. Depending on the scenario, they estimated
real growth to range between 1¼ and 2¼ percent in the medium- to long-term. In the near term,
confidence effects from structural reforms could already support the recovery by boosting
investment.
Box 3. Unstash Japan’s Corporate Cash1
Firms’ preference for holding large cash buffers is likely limiting the scope for increasing wages,
dividends, and investment. Cash holdings by Japanese companies are large compared with other G-7
countries (text chart). The existing literature
suggests that corporate governance is a
significant determinant of cash holdings and
that Japan has lower scores in this area
compared to other G-7 countries regarding
firm-level governance attributes covering:
board composition; audit quality; shareholder
rights; and ownership structure and
compensation.
Staff analysis finds that corporate
governance reform could help reduce
firms’ large cash holdings. An empirical analysis based on a panel of Japanese companies suggests that
improving corporate governance—proxied in the regression by an index summarizing company disclosure
of governance data—could significantly reduce corporate cash holdings. Reform options include
complementing the recently introduced Stewardship Code2 for institutional investors with a corporate
governance code for firms, and measures to expand the use of independent outside directors beyond
current plans.
1 Prepared by C. Aoyagi and G. Ganelli (OAP). See C. Aoyagi and G. Ganelli (2014), “Unstash the Cash! Corporate Governance
Reform in Japan”; draft IMF Working Paper.
2 A Stewardship Code is a set of principles for institutional investors to help improve long-term returns to shareholders and the
efficient exercise of fiduciary responsibilities.
0%
10%
20%
30%
40%
US
UK
Japan
Italy
Germany
France
Canada
Listed Firms Cash & Equivalents Holdings (2004-12 Average)
(In percent of market capitalization)
Source: Bloomberg
JAPAN
14
INTERNATIONAL MONETARY FUND
MAINTAINING FOCUS ON FISCAL SUSTAINABILITY
18. Japan’s fiscal balance is projected to improve over the near term, but longer-term
plans remain undefined. The structural primary deficit is estimated to shrink by an annual average
of 1 percent of GDP during 2014–16 after weakening modestly in 2013 to -7.0 percent of GDP on
account of new stimulus spending (Table 2 and
Figure 8). This adjustment in staff’s baseline
assumes that the consumption tax rate will be
raised to 10 percent, previous stimulus winds
down, and commitments to current public
expenditure containment are met (in sum
2¼ percent of GDP). But even with these
measures, the authorities may not achieve their
G20 goal of halving the primary deficit
by FY 2015 to 3.3 percent of GDP (and this target
would slip out of reach with a corporate income
tax rate cut or the introduction of multiple consumption tax rates).11 No fiscal consolidation plans
beyond 2015 have been announced to reach the G20 commitment of primary balance by FY 2020,
which would stabilize the debt-to-GDP ratio, but not bring it down.
Policy Issues and Staff’s Views
19. Even after factoring in the anticipated second stage increase of the consumption tax,
further consolidation is needed to contain large fiscal risks. The consumption tax rate increase in
April to 8 percent was a major achievement, but is only a first step towards fiscal sustainability.
Staff’s debt sustainability analysis (DSA), which assumes implementation of both consumption tax
rate increases, shows that the gross debt-to-GDP ratio continues rising beyond the medium-term.
Without further policy measures, the fiscal position is unsustainable (chart, DSA Annex V). Staff
estimates that after 2015 a further fiscal adjustment of 6¼ percent of GDP is needed under the
baseline to put the debt-to-GDP ratio firmly on a downward trajectory. A gradual adjustment pace
would strike the right balance between reversing the debt dynamics in a decisive manner and
safeguarding the recovery.
20. The second consumption tax rate increase in 2015 to 10 percent with a uniform rate
should be confirmed. Raising the tax rate further at a moderate pace would help establish fiscal
policy credibility. Staff estimates that fiscal consolidation in 2015 would slow growth by ½ percent,
leaving growth in 2015/16 still above potential under the baseline. There is a valid concern, however,
that the higher consumption tax could harm low-income households. These equity considerations
would be best addressed through the existing subsidies—which could be improved once the new
tax identification numbers are introduced—instead of reducing rates on essential items, as this
11 The authorities’ target is defined on a consolidated central and local government basis.
150
200
250
300
150
200
250
300
2005
2010
2015
2020
2025
2030
Fiscal adjustment scenario3/
Japan: Gross Public Debt 1/
(In percent of GDP)
Sources: Cabinet Office; and staff estimates and projections.
1/ Gross debt of the general government including the social security fund.
2/ Withdrawal of fiscal stimulus and consumption tax increases to 10 percent in 2015 are assumed.
3/ Policy adjustment scenario assumes a 8.5 percent of GDP improvement (baseline scenario+6¼ points) in
the structural primary balance between 2015 and 2020.
Baseline scenario2/
JAPAN
INTERNATIONAL MONETARY FUND
15
would hurt efficiency, increase compliance and administrative costs, and result in permanent
revenue losses.12
21. A post-2015 fiscal consolidation plan is urgently needed and should include further
revenue measures and entitlement reforms.
Such a plan should be as growth friendly and
equitable as possible and would allow more near-
term flexibility to respond to downside risks.
Options (see text table) include gradually
increasing the consumption tax to at least
15 percent, broadening the personal income tax
base, and taking measures to contain pension and
health care spending.13 Reforms of the spousal
deduction from the personal income tax and
threshold below which dependent spouses are
exempted from paying social security
contributions should be reviewed to remove disincentives to female labor force participation. A
restructuring of the currently untargeted wage deductions scheme, which creates incentives for
firms to expand their payroll to reduce the corporate income tax liabilities, could further enhance
efficiency while raising revenue.14
22. Reforms of the fiscal framework could help safeguard hard-won consolidation gains.
As the fiscal adjustment will span a decade, consolidation gains should be safeguarded through a
stronger fiscal framework grounded in medium-term rules to curb expenditures and limits on the
use of supplementary budgets.
23. The government recently decided to move ahead with a CIT rate cut to below
30 percent, with details and an exact timeframe to be determined. Reducing the CIT rate would
have economic benefits, but would require offsetting fiscal measures to prevent a further rise in
fiscal risks (Box 4). Revenue losses could range between ½ to 1 percent of GDP depending on the
size of the rate reduction (text table below). Staff analysis shows that a CIT cut raises investment and
growth, but not sufficiently to make them self-financing. There is some scope for CIT base
broadening, but an elimination of the most distortionary allowances or incentives, such as those for
SMEs, would provide only limited revenue gains. Removal of some key allowances, for instance for
12K. Kang, M. Keen, M. Pradhan and R. de Mooij, 2011 "Raising the Consumption Tax in Japan: Why, When, How?,"
IMF Staff Discussion Notes 11/13.
13 K. Kashiwase, M. Nozaki, and K. Tokuoka (2012), “Pension Reforms in Japan”, IMF Working Paper 12/285.
14 Wage earners can claim standard deductions that rise with income up to a certain threshold and are substantially
higher than actual expenses or similar deductions in other countries. These deductions create incentives for SMEs to
incorporate and distribute profits through directors’ salaries, thereby reducing corporate income tax liabilities. For
more details, see R. de Mooij and I. Saito (2014), “Japan's Corporate Income Tax: Facts, Issues and Reform Option”,
draft IMF Working Paper.
3.4
2.6
2.9
2.5
1.8
5.4
9.0
9.7
8.2
9.6
5.2
4.4
11.6
11.0
10.7
3.1
3.0
4.3
6.6
1.1
11.9
5.4
6.8
17.0
14.4
29.0
24.3
35.2
45.3
37.6
0
10
20
30
40
50
0
10
20
30
40
50
Japan
US
UK
France
Germany
Corporate Income Tax
Personal Income Tax
Consumption Tax
Other Taxes
Social Security Contributions
Sources: OECD and IMF WEO database.
General Government Tax and Social Security Revenue, 2012
(In percent of GDP)
17.3
18.9
28.5
28.3
23.2
JAPAN
16
INTERNATIONAL MONETARY FUND
Research and Development (R&D) expenses, could weaken the positive investment effects of a rate
cut and should be avoided (Figure 8).
24. To limit fiscal risks while maximizing the economic impact, a new tax schedule should
be announced upfront, but phased in over time. This would help reduce the revenue costs and
allow offsetting measures to be introduced over time to limit their growth impact. As an alternative
to a CIT rate cut, consideration could be given to opt for an Allowance for Corporate Equity (ACE)
system, which would be a more cost effective way of encouraging investment and has recently been
adopted in some advanced and emerging economies.
Estimates of
Authorities'
Current Plan
IMF's Additional
Adjustment Options
Total Savings
2¼
6¼
of which
Revenue
1.0
2.5
Increase consumption tax rate from 8 to 10 1/
1.0
Increase consumption tax rate from 10 to 15
2.5
Cut corporate tax rate (details unknown)
-
Cut corporate tax rate (from 34.6 to 25-30 percent)
-0.5 to -1.0
Broaden corporate income tax base
+
+
Broaden personal income tax base (including a reduction of the wage
deduction)
0.5 to 1.0
Eliminate preferential tax treatment for pension benefit income 2/
¼
Collect pension contributions from dependent spouses of workers
covered by the employees' insurance 2/
¼
Collect health insurance premiums from dependent spouses of workers
covered by the employees' insurance
+
Reduce pension payroll tax
-0.5
Introduce carbon tax 3/
+
Raise inheritance tax further
+
+
Expenditure
1¼
3¾
Withdraw the financial crisis fiscal stimulus
0
0
Withdraw the recent stimulus
¾
Curb growth rate of nominal non-social security spending (excluding
interest payments) 4/
¾
1.5
Limit annual nominal growth in social security spending (excluding the
items below) 5/
-¼
1¾
Raise pension eligibility age to 67 or higher 2/
¼
Reduce benefits for wealthy retirees 2/
¼
Note: Staff estimates; '-' and '+' refers to unidentified costs or savings
3/ Fiscal savings are assumed to be 0.1 percentage points of GDP or lower and spent on energy saving initiatives.
Options for Fiscal Policy Adjustment Until 2020
(Excluding reconstruction spending, in percentage points of GDP)
1/ Introducing multiple rates would reduce additional revenue.
2/ Lower bound estimate of Kashiwase, Nozaki, and Tokuoka, 2012 (IMF Working Paper 12/285).
4/ Freezing expenditure in nominal terms.
5/ Annual nominal growth at ½-1 percent. The authorities plan to use part of additional revenue from the second-stage consumption tax hike to
increase social security spending.
JAPAN
INTERNATIONAL MONETARY FUND
17
Box 4. Reforming the Corporate Income Tax System1
The government announced in June plans to
reduce the CIT rate as a way to stimulate the
economy. The Japanese statutory rate (34.6 percent)
and revenue to GDP ratio (3.4 percent) are among the
highest in the OECD, some 5 percentage points
higher than in other G7 economies.
Despite recent reforms, Japan’s CIT system is
relatively distortionary and complex. In 2012, the
statutory rate was already lowered by 5 percentage
points following a shift to territorial taxation in 2009,
but large distortions remain. Differences in treatment
between debt and equity financing and between
incorporated and unincorporated firms are large and lead to distortions and arbitrage. A large number of special
tax incentives has reduced transparency and effectiveness. Varying rates by region, firm size, and income level
creates further distortions.
A CIT rate cut could have a positive yet limited impact on investment, including through higher inward
FDI. International evidence suggests that a 5 percentage point CIT rate cut may increase investment by some
2 or 3 percent. Japan-specific estimates point to potentially smaller effects. FDI is expected to rise too, but given
that inbound FDI is relatively small in Japan, effects through this channel may not be very large.
A CIT rate cut is unlikely to be self-financing. Revenue effects are generally based on static assessments when
designing a comprehensive tax reform. Combining international experience with Japan-specific features
suggests that the dynamic long-run effects following a CIT cut may be mitigated by perhaps 10–30 percent, far
from fully offsetting its impact. The short-run fiscal costs can be reduced by gradually phasing in the tax
reduction to reduce the windfall gain on returns to past investment. In the long run, other taxes need to be
raised, such as the consumption tax; or the local CIT could be replaced by local property taxes.
Revenue gains from base broadening are limited, but streamlining tax incentives including those for
SMEs is needed. Tax incentives come at an estimated overall revenue loss of 0.2 percent of GDP at the central
government level. Some of these incentives may be justified on efficiency grounds, including for stimulating
R&D. The generosity of depreciation allowances and loss carry forwards is also comparable to that in peer
countries. The number of tax incentives in Japan is very large, however, and not all seem effective, particularly
those applicable to SMEs, including special reduced rates, which can in fact be distortionary.
An Allowance for Corporate Equity (ACE) could stimulate investment, with minimal fiscal costs in the
short run. Introducing an ACE would directly reduce the cost of equity financing, thus boosting incentives to
invest. Moreover, it also eliminates debt bias, which gives incentives for excessive debt accumulation, making
firms more vulnerable to shocks. If an ACE is applied only to new equity, as recently introduced in Italy, revenue
losses will be incurred only gradually. The investment stimulus per yen of tax relief is thus maximized.
1 Prepared by R. de Mooij (FAD) and I. Saito (APD). See also de Mooij and Saito (2014) “Japan’s Corporate Income Tax: Facts, Issues
and Reform Options”, draft IMF Working Paper.
2.9
3.4
0
1
2
3
4
5
Slo
ven
ia
H
un
ga
ry
Esto
nia
Ger
m
an
y
Tu
rk
ey
N
eth
er
la
nd
s
Po
la
nd
Gr
ee
ce
Ic
ela
nd
Sp
ain
Fin
la
nd
A
us
tr
ia
Slo
va
k
Rep
ub
lic
Fr
an
ce
Ir
ela
nd
U
nited
Sta
tes
Is
ra
el
A
ve
ra
ge
Ita
ly
Un
ite
d
Kin
gd
om
Sw
itz
er
la
nd
C
an
ad
a
Sw
ed
en
D
en
m
ar
k
Be
lg
iu
m
Po
rtu
ga
l
Ja
pa
n
C
ze
ch
Re
pu
blic
Ko
re
a
N
ew
Ze
ala
nd
Lu
xe
m
bo
ur
g
A
ustr
alia
Source: OECD
Note: Chile and Mexico data unavailable. Norway excluded (10.4%).
OECD: Corporate Income Tax Revenue (2012)
(In percent of GDP)
JAPAN
18
INTERNATIONAL MONETARY FUND
The Authorities’ Views
25. The authorities considered the increase of the consumption tax a success and agreed
that the second rate increase would be an important contribution to restoring fiscal
sustainability. Despite widespread concerns, early indications were that growth implications of the
tax increase were moderate and the decline in consumption had started to level off in May. Officials
noted that ample fiscal stimulus was in train to prevent the economy from stalling. A decision on the
second consumption tax increase is expected by the end of this year, taking into account several
factors including economic conditions in the third quarter. The introduction of multiple rates on
basic items was under discussion to address equity concerns, but required careful consideration
given potential administrative and revenue costs.15
26. The authorities agreed that fiscal measures needed to be identified beyond 2015 to
stabilize and bring down the debt-to-GDP ratio. They noted that the Fiscal System Council, an
advisory body to the Finance Minister, had published long-term fiscal projections on an
internationally comparable basis, which quantified the size of the required adjustment. The
projections showed that, while public pension expenditure will stabilize, health and long-term care
expenditures are expected to rise substantially. They noted that even under favorable
macroeconomic conditions, there remained a sizeable gap vis-a-vis the FY 2020 primary balance
target and noted that a concrete medium-term fiscal plan would be formulated in 2015.
27. The authorities explained that the costs and benefits of a CIT rate reduction had been
intensively debated. Views within the government varied on the size of the growth benefits, but
there was broad agreement that a tax rate reduction was not self-financing and base-broadening
measures were under discussion to secure offsetting financial resources. Compensating measures
were thus seen as necessary to make a rate cut compatible with the government’s long-term goal of
achieving primary balance by FY 2020.
MONETARY POLICY: STAYING THE COURSE
28. Implementation of the QQE framework has been smooth and transmission has
gradually strengthened. After some initial bond market volatility, 10-year JGB yields have
fluctuated in a narrow range around 60 bps since last summer. Together with rising inflation, this
has contributed to a further decline in real lending rates. Financial institutions have started to
rebalance their portfolios and banks have reduced JGB holdings (from 22 percent in end-2012 to
below 19 percent of total assets by end March 2014) (Box 5). Still, insurance companies and private
pension funds have kept asset allocations broadly unchanged. Finally, market and survey measures
of long-term inflation expectations have risen to between 1¼–1½ percent and, after having been
unchanged since last fall, have begun to rise again recently.
15 Introduction of multiple rates would require adoption of an invoice-credit mechanism in line with the vast majority
of OECD member countries with a valued added tax.
JAPAN
INTERNATIONAL MONETARY FUND
19
Box 5. Portfolio Rebalancing and Capital Outflows1
The success of Abenomics depends to a large extent on whether Japanese investors rebalance their portfolios
towards higher yielding assets thereby lowering borrowing
costs and intermediating risk capital.
A moderate shift of portfolios towards higher yielding
assets is underway. The share of currency, deposits, and
central and local government securities has declined for
households, public pensions, and other financial
intermediaries such as securities investment trusts (chart).
Portfolio rebalancing will likely accelerate over the
near term.
➢
Rising domestic credit demand. Business lending has
risen at the fastest pace since 2008. The latest loan officer survey shows a continued rise in credit demand
in 2014.
➢
Ample intermediation capacity. Banks’ capital ratios are higher than at any time during the last decade,
and loan-loss reserves are at pre-global financial crisis levels. The large share of excess reserves is
depressing profits and raising incentives to increase lending to new and riskier projects.
➢
Review of investment strategies. The Government Pension Investment Fund, with 27 percent of GDP in
assets under management, adjusted its targets from JGBs towards other assets including foreign bonds
and equities in June 2013. Given the size of the fund, this change will likely have knock-on effects to other
institutional investors.
➢
Negative real returns on household deposits. Japanese household hold more than 55 percent of their
assets, or about 875 trillion yen (180 percent of GDP) in the form of bank deposits. With headline inflation
estimated at 2¾ percent this year, real returns are negative. The introduction of new tax-incentivized
saving accounts in 2014 could facilitate a rebalancing process.
➢
A widening of the interest rate differential with the US. Since mid-2013 benchmark yield differentials
between Yen and US dollar denominated securities has widened, raising incentives to expand the share of
foreign assets in investor portfolios.
Rebalancing could result in higher portfolio
outflows. An illustrative scenario analysis under
different behavioral assumptions for institutional
investors shows that additional outflows could range
between USD 80–260 billion (chart). Although only a
small share—about 20 percent—would likely go to
emerging economies, the effects could be large
enough to ease financing conditions. While
instructive, the exercise is partial in nature and does
not incorporate exchange rate effects, nor include
potential flows associated with a rebalancing by
households or firms (FDI).
1 Prepared by M. Nabar and J. S. Kang (APD).
-4
-2
0
2
4
-4
-2
0
2
4
0
10
20
30
40
50
60
Historical fluctuation (2 Std Dev)
Share of Currency, Deposits, and Government Securities
2012
-13
C
h
a
n
g
e
in
S
h
a
re
Corporate
Pensions
Banks
Other Financial
Intermediaries
Public
Pensions
Insurance
Households
Rebalancing
Source: Bank of Japan Flow of Funds, Haver, and Staff Estimates
Currency, Deposits & Government Bonds Holdings (Dec-2013)
(In percent of total portfolio)
0
100
200
300
400
500
600
Passive 1 1/
Passive 2 1/
Active 2/
Past trend
Additional flows to AEs
Additional flows to EMs
Potential Capital Outflows
(In billion US dollars)
Assumptions: 1/ Financial institutions maintain investment strategies (2010/20122/013H2 avg.) except GPIF reduction of
JGB holdings to its benchmark range lower-limit to purchase foreign assets. Banks increase domestic lending at 2013 pace,
while increasing foreign investment to maintain 2013 ROA. Foreign assets returns assumed at 2% and 1.5% under
scenarios 1 and 2 respectively.
2/ GPIF reduces domestic-bond holdings to 45% of total assets while increasing domestic stocks and foreign assets
equally; insurance companies reduce JGB purchases to 2/3 of current pace to increase foreign investment. Other investors
(e.g., investment trusts) accelerate pace of foreign investment about 50%. Banks domestic lending increase at 2008 peak
pace, while overseas lending is as in 2011. Banks buy foreign assets amounting to half of additional reserves.
Source: IMF staff estmates.
JAPAN
20
INTERNATIONAL MONETARY FUND
Policy Issues and Staff’s Views
29. Monetary policy is appropriately accommodative and no further easing is needed at
this point. With actual and expected inflation
steadily progressing toward the 2-percent target
(anticipated by 2016–17 in Staff’s baseline),
increasing asset purchases now is not necessary.
Rather policy space should be preserved to
address downside risks. Since the current
aggressive pace of monetary easing may need to
be maintained for an extended period, clarifying
asset-purchase plans post end-2014 could further
enhance transparency.
30. The BoJ should act quickly if actual or expected inflation stagnates or growth
disappoints. Policy options include expanding purchases of private assets and government bonds,
and further lengthening the maturities of assets being purchased. The latter would accelerate
portfolio rebalancing by insurance companies and pension funds and reduce banks’ duration risks
further, thereby facilitating risk taking. In addition, there is room to expand special lending facilities,
including by increasing the size, reducing the funding cost, and lengthening the term beyond the
current 4 years. The impact of these latter measures is, however, likely small, given already very easy
financing conditions.
31. Over time, sustained easing without complementary reforms would raise risks to
financial stability and complicate the exit. Asset purchases are already unprecedented: each year
that the QQE program is maintained, the BoJ will add approximately 5 percent of the outstanding
stock of JGBs to its existing holdings, estimated at 23 percent at end 2014. Continuing with QQE in
its current form for too long could impair market liquidity or give rise to financial stability risks as
asset prices could become disconnected from fundamentals. As such, there are clear risks from
potentially overburdening monetary policy. Therefore, structural and fiscal reforms are critical to
strengthen policy transmission in a sustained manner and facilitate an earlier exit from QQE.
32. Although exit still remains far off, planning for it should continue. Because of the larger
share of longer dated securities on the BoJ’s balance sheet, a passive strategy as used in 2005/06 of
rolling off maturing bonds would require more time to complete and imply higher interest rate risk.
Indemnification against capital losses from rising interest rates (as large as 1¼ percent of GDP for a
100 bps rise) could be considered, but needs to be weighed against the potential fiscal risk from
these contingent liabilities.
33. BoJ communication has been effective, but more could be done going forward to help
anchor expectations. The BoJ should continue to highlight the overarching goal of achieving the
inflation target in a stable manner, but could clarify the indicators used to assess whether inflation is
on track. In due course, the criteria for determining whether inflation has been sustainably achieved
May-12
Nov-12
May-13
Nov-13
May-14
0
0.5
1
1.5
2
0
0.5
1
1.5
2
Quick Survey 10Y
Inflation-Swaps 10Y
Consensus Forecasts 10Y
Break-even rate 10Y JGBs
Long Term Inflation Expectations
(In annual percentage points)
Source: Bloomberg, Quick Survey, Consensus Forecasts, and IMF estimates.
JAPAN
INTERNATIONAL MONETARY FUND
21
could be spelled out, which would also help guide expectations when there is a need to adjust the
asset-purchase program and facilitate preparations for eventual exit.
The Authorities’ Views
34. The BoJ stressed that it has come halfway towards reaching its inflation target, and
views that the progress will continue, albeit with reduced tailwinds this year. Tailwinds from
last year’s depreciation were fading and the near-term evolution of inflation expectations remained
uncertain. The BoJ expected inflation to start increasing again towards the end of the year, reaching
around 2 percent—the price stability target—in or around fiscal year 2015, but was ready to act if
inflation began to trail off the expected path. In this regard, they felt that the parameters of QQE
beyond end-2014 could be extrapolated from the current path since the BoJ's forward guidance
already conveys the idea that the easing stance will be maintained as long as it is necessary to
achieve the inflation target in a stable manner. They cautioned, however, that they will examine both
upside and downside risks to economic activity and prices, and make adjustments as appropriate.
35. The BoJ agreed that there was room to augment the communication strategy, but
thought that providing specific forward guidance at this time could be counterproductive.
They preferred to use speeches and press conferences by BoJ Policy Board members to help explain
developments and its forecast. With inflation outcomes beginning to influence expectations in the
right direction, they felt that providing specific information at this stage on indicators to help track
progress toward 2 percent was not necessary to help anchor expectations. Rather the BoJ felt it
would be counterproductive to provide more explicit guidance given the uncertain path of inflation
towards 2 percent. Officials also pointed out that recently the US Federal Reserve and the Bank of
England had backed away from state contingent forward guidance. Nevertheless, as inflation
approaches the target, the BoJ would continue to examine the effectiveness of its communication
strategy so as to achieve 2 percent inflation in a stable manner. With regard to exit, they noted that
they would apply a wide range of tools and draw on the BoJ’s own experience in 2005/06 and
closely watch other central banks, including the U.S. Federal Reserve and The Bank of England.
THE EXTERNAL POSITION AND SPILLOVERS
36. The current account surplus declined
further in 2013 to 0.7 percent of GDP.
Although the yen depreciated by about
23¾ percent between October 2012–April 2014
(reversing a 27¾ percent real appreciation
during July 2007–September 2012), so far this
has failed to arrest the decline in Japan’s trade
balance. After declining for two years, the goods
trade deficit deteriorated by another
1 percentage point of GDP to 1.8 percent in 2013
as a result of higher imports of energy products
-2
0
2
4
6
-2
0
2
4
6
1997
1999
2001
2003
2005
2007
2009
2011
2013
Current Account
Goods Balance
Japan: Current Account and Goods Balance
(Percent of GDP)
Source: CEIC Asia database
JAPAN
22
INTERNATIONAL MONETARY FUND
and consumer goods and flat exports (Figure 2). A rising income balance surplus from higher
interest income on overseas investment moderated the impact.
A. External Sector Assessment
37. Taking last year’s trade developments into account, the yen is assessed as broadly
consistent with medium-term fundamentals and desirable policies (Annex III). The assessment
takes temporary factors affecting the trade balance into account as well as structural shifts in the
external sector, the effects of which have become more apparent during the last year.
➢
Structural factors are exerting a drag on the trade balance and making it less responsive to the
movement of the yen. The rising share of offshore production—exceeding 20 percent of overall
manufacturing output—and Japan’s upstream position in the global supply chain have reduced
the sensitivity of exports to fluctuations in the yen.16 On the import side, with the supply of
domestic nuclear power likely to be permanently lower, a portion of the current elevated energy
imports will persist. Finally, imports of consumer electronics and IT devices have soared during
the last few years and structurally increased the import share in Japan’s domestic final demand.
Staff estimates that these effects lead to a permanent trade deficit, which is more than offset by
a surplus on the income account. As a result, the current account norm is estimated at around
2 percent of GDP—about 1½ percentage point of GDP lower than assessed last year.
➢
Temporary factors have also weakened Japan’s trade balance, including due to rush demand
ahead of the consumption tax increase. The expectation is that the external balance will
strengthen—to a surplus of around 2 percent of GDP over the medium to long term— as these
effects fade and exports pick up in line with past lags.
38. For the time being, there is large uncertainty about Japan’s external assessment. In
addition to the above factors, the assessment assumes the implementation of desirable
macroeconomic policies and in the case of Japan this requires full implementation of all three
arrows of Abenomics. The effects of the new policies on the external balance are uncertain given
that they are trying to accomplish several goals – accelerate growth, lift inflation, lower public debt.
As the policies are being implemented, the assessment will be revisited in the future as outcomes
become clearer.
B. Spillovers
39. Spillovers have been mild during the first year of Abenomics. Exports have changed
little in response to the weaker yen and capital flows through overseas’ bank lending and
investment (FDI) have remained broadly in line with past trends (Table 3). Although net capital
outflows by Japanese investors picked up in the second half of 2013—mainly to advanced
16 See 2014 Spring APD REO Chapter 3 for more details on changes in Japan’s position in the supply chain.
JAPAN
INTERNATIONAL MONETARY FUND
23
countries—this was more than offset by non-resident inflows into Japan (particularly into equities).
More recently, net inflows have turned positive again after a period of outflows in January/February.
40. Spillovers are likely to rise over the near term as exports and imports adjust to the
weaker yen, potentially adversely affecting competitors, at least in the near term. Spillovers through
capital markets are also expected to rise as Japanese investors, especially, banks, pension funds, and
insurance companies, start diversifying their investments overseas. These outflows will help to
cushion the effects of tightening global financial conditions, including in emerging markets (EMs). A
scenario analysis shows that portfolio rebalancing by banks and institutional investors could lead to
additional capital outflows of up to US$260 billion (Box 5)—almost doubling the size of foreign
portfolio investment and bank lending relative to past trends—over the near to medium term. Some
of these flows would go to EMs, moderating tightening financial conditions. Under a global
downside risks scenario with sharply tighter global financial conditions and growth disappointments
in several EMs (2014 Spillover Report),17 growth would slow substantially in Japan with negative
feedback effects via trade and supply-chain channels. A slowdown in Japan would feed back to
trading partners in the region, in particular suppliers to Japanese exporters and producers of final
goods.
41. As long as Japan continues to proceed with its reform agenda, positive spillovers will
dominate over the medium-term. Under the baseline, completing all three arrows continues to be
the preferred policy package for both Japan and the global economy as it would avoid
overburdening monetary policy and undue weakening of the yen, boost import demand through
higher growth while strengthening Japan’s competitiveness, and removing an important tail risk by
restoring fiscal sustainability. During a growth slowdown, allowing fiscal stimulus to play a larger
role would help minimize potential spillovers to the rest of the world. This underscores the need for
a concrete medium-term fiscal strategy beyond 2015, which would create room for more fiscal
flexibility.
The Authorities’ Views
42. The authorities expressed skepticism about the assessment of the external position.
They highlighted considerable uncertainty whether the current account would rise to around
2 percent of GDP as expected by staff. The factors cited for this uncertainty included persistently
high oil prices, the continuation of relocation of production abroad, and declining competitiveness
in some manufacturing sectors.
43. The authorities agreed that spillovers of successful Abenomics would likely be
positive. They noted that spillovers had been benign so far and that potential capital outflows could
help ease financing conditions of EMs in the region. They also added that spillovers through the
17 The scenario assumes a sooner than expected tightening of financial conditions (by 100 basis points largely
through higher term premia) in advanced economies, resulting from perceptions of stability concerns, rather than
through stronger economic growth. This is combined with a deeper than expected structural slowdown in EMs of
½ percentage point annual growth over the next three years.
JAPAN
24
INTERNATIONAL MONETARY FUND
trade channel would be more limited than in past episodes of large depreciations due to structural
factors, including from the offshoring of production. The authorities were somewhat skeptical about
staff’s estimates that growth spillovers from EMs were larger for Japan than for other advanced
economies.
FINANCIAL SECTOR: REBALANCING RISKS
44. Financial sector health has improved, but further gains could prove more challenging.
Banks have benefitted from higher equity market valuations and growing loan books. Amid low
credit costs and declining loan loss provisioning, capital positions have strengthened and
internationally-active banks remain on track to meet Basel III capital requirements. Moreover, QQE
has reduced interest rate risk for major banks which have sold part of their JGB holdings to the BoJ,
while regional banks have been slow to shed their holdings given more limited lending
opportunities, (Table 5). Insurance companies have maintained their solvency margin ratios at levels
well above 200 percent—the regulatory threshold to take corrective actions—and their investments
in overseas assets and domestic stocks have remained broadly the same over the last year.
Policy Issues and Staff’s Views
45. The search for higher yield by Japanese investors, while welcome, could generate new
risks. Declining net interest margins on domestic loans and rising excess reserves are exerting
pressure on banks’ core profitability. Interest rate risk for regional banks remains high and
profitability pressures are most evident in this sector (2012 FSAP Update). As banks plan to
rebalance their portfolios, they may incur new risks in a number of areas:
➢
Major banks continue to expand abroad, suggesting that securing stable and long-term dollar
funding will increasingly become a challenge. Supervisors should continue to encourage these
banks to strengthen their funding sources, such as by reducing their reliance on foreign
exchange swaps, issuing longer term dollar-denominated bonds, and building a depositor base
in overseas operations. Cross-border collateral arrangements for banks—already in place with
Singapore and Thailand and agreed to be established with Indonesia—could also help reduce
local currency funding risks in overseas markets.18
➢
Regional banks. The authorities should continue to strengthen capital standards of domestically-
active banks, including by reassessing the treatment of unrealized losses in capital. The
authorities should further consider developing a strategy to establish a stronger regional
banking sector, including through private sector-led consolidation, as recommended by
the 2012 FSAP Update.
18 Under these arrangements, Japanese banks can draw funding from the host overseas central bank by pledging
JGBs as collateral with the host central bank.
JAPAN
INTERNATIONAL MONETARY FUND
25
As for Japan Post bank, with plans underway to sell a part of the government’s share held through
Japan Post Holdings, due care should be given to possible implications. In particular, any potential
expansion of Japan Post into new lending bears risks given limited expertise and through
implications for other financial institutions. In addition, remaining AML/CFT deficiencies should be
addressed swiftly in line with the Public Statement on Japan published by the Financial Action Task
Force in June 2014.
The Authorities’ Views
46. The authorities highlighted that financial system soundness had further improved,
pointing to rising capital adequacy ratios and low Nonperforming Loan (NPL) ratios. They
noted that they are paying close attention to the profitability and risk-management practices of
major and regional banks, including interest rate risk from JGB holdings and foreign exchange
funding risk from banks' expansion abroad. The banking supervisor agreed that core business profits
of banks were decreasing and that they needed continuous efforts to increase their earnings at
home and abroad with appropriate risk management.
➢ As for regional banks, the authorities stated that they recognized the need for each regional
bank to consider its mid- and long-term business strategy in response to structural challenges,
such as demographic trends in an aging society. They noted that business consolidation should
be determined based on each banks' voluntary judgment, while the FSA will continue to
encourage the top management of banks to take on a leadership role in recognizing the
business challenges and identifying ways to address them.
➢ On the treatment of unrealized losses on security holdings for domestically-active banks, the
authorities reiterated their view that the treatment is necessary for mitigating pro-cyclicality of
capital levels as gains and losses vary over the cycle. In their view, the current treatment does
not provide banks an incentive to increase exposure to securities, as they pay close attention to
risks from security holdings and try to capture such risks at an early stage. Finally, transparency
is ensured since unrealized gains and losses are within the scope of accounting disclosure.
The FSA also stressed that it was focused on strengthening the role of the financial sector in
supporting growth, emphasizing the need for banks to be more proactive in nurturing new
businesses and providing high quality financial services.
STAFF APPRAISAL
47. The economy is expected to grow at an above potential pace in 2014, but medium-
term risks remain substantial. Although there will be an inevitable contraction in the second
quarter as payback for the elevated demand seen prior to the consumption tax increase, the
underlying growth momentum is strengthening as seen in tight labor markets and strong
investment in the first quarter. A successful handover to a sustained and private demand-led
recovery requires however further action on several fronts.
JAPAN
26
INTERNATIONAL MONETARY FUND
48. More forceful growth reforms are needed to overcome structural headwinds to raising
growth and ending deflation The next round of structural reforms should lift labor supply, reduce
labor market duality, enhance risk capital provision, and continue with agricultural and services
sector deregulation. Corporate governance reforms already underway could help reduce firms’
preference for large cash holdings.
49. A concrete medium-term fiscal reform plan is urgently needed. Successive consumption
tax increases are critical to establish a track record of fiscal discipline given very high levels of public
debt. Early adoption of a concrete medium-term fiscal consolidation plan beyond 2015 would build
confidence in the sustainability of public finances and allow more near-term flexibility to respond to
downside risks. Plans to lower the corporate tax rate have growth benefits, but should proceed only
in combination with measures to offset revenue losses consistent with plans to restore fiscal
sustainability.
50. Monetary policy is appropriately accommodative. With inflation and inflation
expectations increasing, no further easing is needed at this point. In case downside risks to the
inflation outlook materialize, the BoJ should act swiftly through further and/or longer-dated asset
purchases. Communication should focus on achieving 2 percent inflation
in a stable manner aided
by a more transparent presentation of the BoJ’s forecast and underlying assumptions, including
clarifying post-2014 asset purchase plans.
51. The financial sector remains stable. Portfolio rebalancing by financial institutions and
investors is desirable and would help support growth by providing more risk capital. But it also
raises new risks, including from greater overseas engagement. In regional banks, limited growth
opportunities and low net interest margins could further undermine core profitability and weaken
capital buffers. Supervisors should continue to be proactive in monitoring these risks.
52. Japan’s external position is assessed as broadly in balance compared to moderately
undervalued last year. The unexpected lack of an export response to the large yen depreciation
appeared the result of underlying structural changes in the external sector. These include the
offshoring of production and losses in competitiveness in specific sectors. Sustained high energy
imports needs have further weakened the trade response to the depreciation.
53. Launching all three arrows will create benefits for the region and the global economy.
Spillovers via the trade channel and capital flows are expected to increase this year with uncertain
net effects—higher exports but capital outflows—in the short term. As long as Japan continues to
proceed with its reforms, incomes will rise while fiscal risks decline, which will be positive for the
global economy.
54. It is recommended that the next Article IV consultation take place on the standard 12-
month cycle.
JAPAN
INTERNATIONAL MONETARY FUND
27
Figure 1. Japan: Economic Developments and Outlook
Growth rebounded sharply in 2014Q1 on consumption
frontloading and strong business investment.
Payback from consumption frontloading was substantial in
April…
…but strong employment growth and slowly rising earnings
are offsetting this effect.
Replacement investment has accelerated due to an aging
capital stock as well as strong corporate earnings.
Imports are falling with unwinding frontloading demand, but
export recovery remains subdued.
Implementation of public works has been delayed in recent
months due to labor shortages.
-2
-1
0
1
2
3
-2
-1
0
1
2
3
Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14
Private inventories
Private consumption
Net exports
Government spending
Private gross fixed investment
Real growth (q/q)
Contributions to QoQ Growth (SA)
(In percent)
Source: Haver Analytics
70
75
80
85
90
95
100
105
110
90
95
100
105
110
115
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Retail Sales (LHS)
Industrial production of consumer goods (RHS)
Retail sales and consumer goods production
(Index, 2010 = 100, SA)
Source: Haver Analytics
-9
-6
-3
0
3
3.5
4
4.5
5
5.5
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Unemployment (LHS)
Total Earnings (RHS)
Wages Annual Growth and Unemployment
(In percent)
Source: Haver Analytics
90
100
110
120
130
80
90
100
110
120
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Shipments (LHS)
Industrial production (LHS)
Inventory (RHS)
Investment Goods
(SA, 2010 = 100)
Source: Haver Analytics
70
90
110
130
70
90
110
130
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Real exports
Real imports
Real Exports and Imports
(SA, 2010 = 100)
Source: Haver Analytics
85
90
95
100
105
110
115
85
90
95
100
105
110
115
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Japan Public investment (SA)
(Index number, 2010 = 100)
Source: CAO, via Haver Analytics
JAPAN
28
INTERNATIONAL MONETARY FUND
Figure 2. Japan: External Developments
Exports have risen by less compared to model predictions… …and J-curve effects are more drawn out after large
depreciations (trough after 6–8 quarters).
The weak trade balance is related to unchanged export
prices in contract currency...
…and elevated import demand for energy products.
Other factors slowing exports are acceleration of overseas
production…
…and increased competition in traditional sectors of
strength (e.g., electronic imports).
0
20
40
60
80
100
120
83Q4
88Q4
93Q4
98Q4
03Q4
08Q4
13Q4
Actual
Estimated and Projected
Japan: Real Exports1/
(In Trillion Yen)
1/ Estimated up to 2012Q4
Source: IMF staff calculations
-2
-1.5
-1
-0.5
0
0.5
1
1.5
t
t+4
t+8
t+12
t+16
Sep-12 - Dec-13 (24%) + med-term proj.
Dec 04 - Jun-07 (23%)
Dec 99 - Mar 02 (21%)
Jun-95 - Mar-97 (32%)
Dec-88 - Jun-90 (23%)
Periods of Yen Depreciation and the Trade Balance
(In percent of GDP, depreciation magnitude in parentheses)
Note:
t indicates quarter of onset of depreciation period
Source: IMF staff estimates
80
90
100
110
120
130
140
150
96Q1
98Q1
00Q1
02Q1
04Q1
06Q1
08Q1
10Q1
12Q1
14Q1
Yen Basis
Contract Currency
Exports Prices (all commodities)
(Index, 2010 = 100)
Source: IMF staff estimates.
10
12
14
16
18
20
22
24
26
45
50
55
60
65
70
75
80
85
00Q1
02Q1
04Q1
06Q1
08Q1
10Q1
12Q1
14Q1
Real Imports (trillion yen)
LNG Imports (million ton, RHS)
Japan: Imports Demand
Source: IMF staff estimates
Tohoku earthquake
13
15
17
19
21
FY03
FY05
FY07
FY09
FY11
FY13
Japanese Overseas-Production Ratio1/
(In percent)
1/ Japanese production volume overseas to Japanese global production volume
Source: IMF staff estimates
15
16
17
18
19
20
02Q1
04Q1
06Q1
08Q1
10Q1
12Q1
14Q1
Level
2000-12 Average
Imports of Electrical Machinery
(In percent of total non-fuel imports)
Source: IMF staff estimates
JAPAN
INTERNATIONAL MONETARY FUND
29
Figure 3. Japan: Monetary Policy Transmission
The monetary base has expanded rapidly…
…flattening the yield curve further.
Portfolio rebalancing has mainly occurred among
banks...
…which have reduced their JGB holdings.
Excess reserves have risen only partially offset by rising
bank lending…
…and real lending rates have declined since
Abenomics.
0
10
20
30
40
50
Jan-13 Mar-13 May-13 Jul-13
Sep-13 Nov-13 Jan-14 Mar-14 May-14
Current Account Balance
Monetary Base
Currency in Circulation
Japan: Monetary Base and Components
(In percent of GDP)
0
0.5
1
1.5
2
2.5
0
0.5
1
1.5
2
2.5
1y
3y
5y
7y
10y
20y
30y
40y
January 2013
April 2014
JGB Yield Curve
(In percent)
0
10
20
30
40
50
0.0
10.0
20.0
30.0
40.0
50.0
Banks
Insurance
Corporate and
other pension
Public pension
Share as of 2012 Q4
Overall-Portfolio Central-Government Securities Share (2013 Q4)
(In percent of total assets)
Bank of Japan
18.4% (+6.5)
Banks
33.4% (-4.2)
Insurance
19.6% (+0.3)
Corporate and
Other Pensions
3% (+0.3)
Public Pensions
7% (0)
Others (trusts,
securities
companies,
overseas)
18.3% (-3.0)
JGB Holders Composition (2013 Q4)
(In percent of total; figures in parentheses represent change since 2012 Q4)
Source: IMF staff estimates.
98
100
102
104
106
108
50
100
150
200
250
300
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Reserves at BoJ (LHS)
Bank Lending (RHS)
Banks Lending and Reserves
(Index, Dec-1012 = 100)
-3
-2
-1
0
1
2
3
4
-3
-2
-1
0
1
2
3
4
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
1/ Average long-term loan rate minus CPI YoY percent change across all banks.
Source: CEIC Asia database and Haver Analytics Japan database.
Japan: Real Lending Rate1/
(In percent)
JAPAN
30
INTERNATIONAL MONETARY FUND
Figure 4. Financial Markets Developments
Equities rose almost 80 percent from September 2012 to
May 2013, but this year have corrected.
Sovereign bond yields remain near historic lows despite the
normalization of interest rates abroad.
Despite higher volatility in equities, bond, and foreign
exchange markets, dollar funding cost remains stable…
…and financing conditions for firms stay highly
accommodative.
c
Improved sentiment has stimulated demand for credit, which
has recovered since the second half of 2012.
As banks’ exposures to JGBs have declined under QQE,
creating capacity for major banks to further expand overseas,
particularly to Asia.
100
300
500
700
900
1,100
1,300
1,500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14
TOPIX
TOPIX-REIT
S&P 500
TOPIX-BANKS (RHS)
Nikkei VIX (RHS)
Equity Markets
(Indices)
Source: Bloomberg
0
1
2
3
0
1
2
3
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
US Treasury
Germany
JGB
10-Year Sovereign Bond Yields
(In Percent)
Source: Bloomberg
0.0
0.3
0.6
0.9
1.2
1.5
1.8
0.0
0.3
0.6
0.9
1.2
1.5
1.8
Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14
USD LIBOR (3M)
BOJ USD funds-supplying operations rate 1/
FX swaps-Implied USD rate (3M)
Sources: Bloomberg and IMF staff estimates.
1/ USD OIS + 100 bps until Nov. 29, 2011 and OIS rate + 50 bps afterwards.
USD Funding Cost in Japan
(In percent)
0
1
2
3
4
5
6
0
1
2
3
4
5
6
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
AA-rated
A-rated
BBB-rated
Corporate-Government Bonds Spreads (5Y) 1/
(In percentage points)
Source: Bloomberg
1/ Large spike in BBB-rated corporate yields in late 2011 due in part to TEPCO downgrade. Sharp
decline in late 2010 due to credit upgrade of large corporate issuer.
0
1
2
3
0
1
2
3
Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13
Asia
US
European periphery 1/
Core Europe 2/
Total foreign claims
Consolidated Foreign Claims for Japanese Banks
(In trillion US dollars)
Source: BIS.
1/ Includes Greece, Ireland, Italy, Portugal, and Spain.
2/ Includes Germany, France, UK, and Switzerland.
-10
-5
0
5
10
-10
-5
0
5
10
Apr-04
Apr-06
Apr-08
Apr-10
Apr-12
Apr-14
Total
Large corporations
SMEs
Individuals
Japan: YoY Growth in Bank Lending to Corporates
(In percent)
Source: CEIC.
JAPAN
INTERNATIONAL MONETARY FUND
31
Figure 5. Japan: Corporate Sector Developments
Business fundamentals are strong across a wide range of
sectors…
…and corporate savings are high.
Since late 1990s, firms have increased overseas investment
as well as cash holdings…
… while reducing their debt, leading to improvements in
their financial health.
However, non-residential investment has been slow to
recover until recently…
…becoming a drag to growth after the crisis.
-60
-40
-20
0
20
-60
-40
-20
0
20
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Manufacturing
Non-manufacturing
Source: Bank of Japan via Nomura.
Tankan: Overall Enterprise Business Conditions
(In percent)
Favorable
Unfavorable
-9
-6
-3
0
3
6
9
12
Dec-01
Dec-03
Dec-05
Dec-07
Dec-09
Dec-11
Dec-13
Assets
(minus) Liabilities
Financial Surplus/Deficit
Private Nonfinancial Corporates Financial Surplus/Deficit
(In percent of GDP, 4QMA)
Source: Haver Analytics; and IMF staff estimates
0
3
6
9
12
30
35
40
45
50
1982
1987
1992
1997
2002
2007
2012
Cash and deposits
Foreign direct investment (RHS)
Foreign securities investment (RHS)
Cash and Overseas Investment
(In percent of GDP)
Source: Haver Analytics; and IMF staff estimates
0
20
40
60
80
100
120
140
1982
1987
1992
1997
2002
2007
2012
Loans
Securities
Gross debt
Japan: Corporate Sector Gross debt
(In percent of GDP)
Source: Haver Analytics; and IMF staff estimates
10
12
14
16
18
Mar-84
Mar-89
Mar-94
Mar-99
Mar-04
Mar-09
Mar-14
Investment to GDP ratio
1980Q1-2014Q1Average
1994Q1-2014Q1 Average
Business Fixed Investment
(In percent of GDP)
Source: Haver Analytics; and IMF staff estimates.
-1
0
1
2
3
4
5
81-90
91-00
01-07
08-13
Private consumption
Government consumption
Private investment
Government investment
Net exports
Changes in inventories
Real GDP
Contribution to annual growth
(In percent)
Source: Haver Analytics; and IMF staff estimates
JAPAN
32
INTERNATIONAL MONETARY FUND
Figure 6. Japan: Inflation and Inflation Expectations
Price increases are becoming more broad-based as the
consumption tax increase is being fully passed through…
…and extending to consumer durable goods, which have
seen the steepest declines in prices in recent years...
… and capital input prices are also picking up.
However, real earnings have declined as prices went up in
April on account of the consumption tax increase.
Although initially skeptical, professional forecasters are
gradually adjusting their expectations upwards.
Cross country evidence shows that pass-through from VAT
increases is generally about 1, but the timing is uncertain.
-2
-1
0
1
2
3
4
-2
-1
0
1
2
3
4
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
CPI ex. fresh food (Core)
CPI ex. food and energy (Core core)
Source: CEIC Asia Database and IMF staff estimates
Japan CPI Core Inflation
(In YoY percent change)
-20
-15
-10
-5
0
5
10
-20
-15
-10
-5
0
5
10
Durable Goods
Semi-Durable Goods
Non-Durable Goods
Apr-09 - Apr-14
Apr-13 - Apr-14
Consumer Goods Prices
(In percent change)
Source: CEIC and IMF staff estimates
-9
-6
-3
0
3
6
-9
-6
-3
0
3
6
General Purpose
Machinery
Production
Machinery
Transport
Equipment
Electrical
Machinery
Apr-09 - Apr-14
Apr-13 - Apr-14
Capital Goods Prices: Machinery & Transport Equipment
(In percent change)
Sources: CEIC and IMF staff estimates
96
98
100
102
104
96
98
100
102
104
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
All Industry
Manufacturing
Firms with 5+ employees
Firms with 30+ employees
Japan: Real Labor Earnings Index
(2010=100, SA)
Source: CEIC
-0.5
0
0.5
1
1.5
2
2.5
3
2013
2014
2015
2016
2017
2018
2019
2020
Oct 2012
Apr 2013
Oct 2013
Apr 2014
IMF (latest)
Source: Conscensus Forecasts and IMF Staff estimates.
IMF and Consensus Inflation Forecasts 5-10 Years Ahead
(In percent)
-0.5
0
0.5
1
1.5
2
-12 mo
-6 mo
0
6 mo
12 mo
Coefficient
95 % Confidence Interval
Cumulative VAT Pass-through
Note: Cumulative sum of pass-through coefficients. Confidence interval reflects
panel-clustered standard errors.
Source: IMF staff estimates
JAPAN
INTERNATIONAL MONETARY FUND
33
Figure 7. Labor and Wages
Japan’s real wage growth has been lagging productivity
growth for the last twenty year...
…and is exceptionally low compared to other G-7
countries.
The share of non-regular workers increased rapidly in the
last two decade...
...moderating productivity growth…
…as well as depressing wage growth.
Other factors depressing wages include waning influence
of annual wage negotiations for regular workers (Shunto
negotiations) on aggregate wage growth.
-2
0
2
4
-2
0
2
4
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Average Wages
Productivity
Source: OECD
Labor Productivity and Average Wages Growth
(In YoY percent change)
Canada
France
Germany
Italy
Japan
UK
US
0.0
0.5
1.0
1.5
0.0
0.5
1.0
1.5
2.0
A
ve
ra
ge
W
age
s
Labor Productivity
Source: OECD; and IMF staff calculations.
Real Wage and Labor Productivity Growth (1991–2012)
(In percent change YoY)
15
20
25
30
35
40
-160
-80
0
80
160
240
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
Regular workers excluding executives (LHS)
Non-regular workers (LHS)
Share of non-regular workers (percent, RHS)
Source: Ministry of Internal Affairs and Communications, and IMF staff calculations.
Annual Employment Change Decomposition
(In thousand persons)
-3
-2
-1
0
1
2
2001
2003
2005
2007
2009
2011
2013
Effect of changes in part-time wages alone
Effect of changes in full-time wages alone
Effect of changes in both full- and part-time wages
Overall effect on nominal wages
Contributions to Wages YoY Growth
(In percent)
Source: Haver Analytics, IMF staff estimates
-5
-2.5
0
2.5
5
-5
-2.5
0
2.5
5
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Shunto wage
Nominal wage
Source: Ministry of Health, Labor and Welfare
Japan: Wage Growth
(In percent)
-25%
0%
25%
50%
75%
0
250
500
750
Productivity (LHS) 1/
Share of non full-time employees (RHS)
1/ Productivity measured as value-added per worker.
Source: Mizuho research, Ministry of Internal Affairs & Comminications, IMF staff estimates.
Labor Market Duality and Productivity by Sector
JAPAN
34
INTERNATIONAL MONETARY FUND
Figure 8. Japan: Fiscal Developments and Tax Reform
A modest consolidation is in the pipeline, but deficits are
projected to remain.
Social security benefits have risen steadily, and the gap
with social contributions is expanding.
Non-social security spending has remained the lowest
among OECD economies.
Tax reform is crucial as Japan’s revenue is relatively
low, but cutting the corporate income tax rate could
make a consolidation package more growth-friendly.
In addition to a relatively large negative impact on the
economy, a high corporate income tax is expected to
discourage inward FDI and promote outward FDI.
Overall, economic impact of a corporate income tax
cut is positive, but far from making it self-financing.
-4
0
4
8
0
15
30
45
2000
2005
2010
2015
2019
Structural primary improvement (RHS)
Revenue
Expenditure
Projection
General Government Fiscal Balance
(In percent of GDP)
Source: WEO database; and IMF staff estimates.
0
10
20
30
40
50
60
D
en
m
ark
Sw
ed
en
Fin
la
nd
C
an
ad
a
H
un
ga
ry
Slo
ve
nia
A
ustra
lia
Ire
la
nd
Eu
ro
A
re
a
N
eth
erla
nd
s
N
or
w
ay
Fra
nc
e
C
ze
ch
Re
pu
blic
Tu
rk
ey
Sp
ain
Un
ite
d
Kin
gd
om
Germ
an
y
U
nited
Sta
tes
Lu
xe
m
bo
urg
Po
la
nd
Be
lg
iu
m
A
us
tria
Po
rtu
ga
l
N
ew
Zea
la
nd
Slo
va
k
Rep
ub
lic
Gre
ec
e
Sw
itz
erla
nd
Isra
el
C
hile
Ja
pa
n
OECD: Spending excluding Social Security and Interest 1/ 2/
(In percent of GDP, 2013)
Source: IMF WEO database.
1/ OECD countries with missing data (e.g., Italy) are not reported here.
2/ General government basis.
0
20
40
60
0
20
40
60
Ire
la
n
d
Tu
rke
y
S
w
itz
e
rla
n
d
S
w
e
d
e
n
U
n
ite
d
K
in
g
d
om
K
ore
a
O
E
C
D
A
v
e
ra
g
e
G
re
e
ce
C
a
n
a
d
a
Ita
ly
Ne
w
Z
e
a
la
n
d
Norw
a
y
A
u
stra
lia
M
e
xic
o
S
p
a
in
G
e
rm
a
n
y
P
ortu
g
a
l
F
ra
n
ce
Ja
p
a
n
U
n
ite
d
S
ta
te
s
2013
2000
1990
Source: OECD
CIT Statutory Rate: Selected OECD Economies
(In percent)
0
20
40
60
80
GBR
FRA
AUS
CAN
BRA
DEU
RUS
ITA
USA
KOR
JPN
Inward FDI
Outward FDI
Stock of FDI
(In percent of GDP)
Sources: IMF Coordinated Direct Investment Survey.
Long-run effect
(in percentage change)
Investment
5½
- Cost-of-capital effect
4
- Cash-flow effect
1
- Foreign direct investment
½
Wages
3½
GDP
2
Revenue implications
- Short run (static/assumption)
1
- Long run
0.7-0.9
Notes: See De Mooij and Saito 2014, IMF Working Paper
Estimated effects of a hypothetical lower CIT rate by 1 %of GDP
0
5
10
15
20
25
0
5
10
15
20
25
FY1990
FY1995
FY2000
FY2005
FY2011
Other
Elderly care
Health care
Pensions
Total social security contributions
Total social security benefits
Sources: National Institute of Population and Social Security Research
Social Security Benefits and Contributions
(In percent of GDP)
JAPAN
INTERNATIONAL MONETARY FUND
35
Table 1. Japan: Selected Economic Indicators, 2009–15
Table 1. Japan: Selected Economic Indicators, 2009–15
Nominal GDP: US$ 4,900 Billion (2013)
Population: 127 Million (2013)
GDP per capita: US$ 38,478 2013)
Quota: SDR 15.6 Billion (2013)
2009
2010
2011
2012
2013
2014
2015
Growth (percent change) 1/
Real GDP
-5.5
4.7
-0.5
1.4
1.5
1.6
1.1
Domestic demand
-4.0
2.9
0.4
2.3
1.8
1.8
0.8
Private consumption
-0.7
2.8
0.3
2.0
2.0
0.7
0.7
Gross Private Fixed Investment
-14.7
-0.5
4.3
3.5
0.3
6.7
3.9
Government consumption
2.3
1.9
1.2
1.7
2.0
1.2
0.5
Public investment
7.0
0.7
-8.2
2.8
11.4
3.9
-9.6
Stockbuilding 2/
-1.5
0.9
-0.2
0.1
-0.3
-0.2
0.0
Net exports 2/
-2.0
2.0
-0.8
-0.7
-0.2
0.0
0.2
Exports of goods and services 3/
-24.2
24.4
-0.4
-0.1
1.7
7.2
3.5
Imports of goods and services 3/
-15.7
11.1
5.9
5.3
3.4
8.2
2.8
Inflation (annual average)
CPI 4/
-1.3
-0.7
-0.3
0.0
0.4
2.8
2.1
GDP deflator
-0.5
-2.2
-1.9
-0.9
-0.6
1.4
1.6
Unemployment rate (annual average)
5.1
5.0
4.6
4.3
4.0
3.9
3.9
`
Government (percent of GDP)
General government
Revenue
29.6
29.6
30.8
31.2
31.7
33.0
33.8
Expenditure
40.0
38.9
40.6
39.9
40.0
40.0
39.7
Overall Balance
-10.4
-9.3
-9.8
-8.7
-8.3
-7.0
-5.9
Primary balance
-9.9
-8.6
-9.0
-7.8
-7.6
-6.3
-5.0
Public debt, gross
210.2
216.0
229.8
237.3
243.4
243.2
242.7
Money and credit (percent change, end-period)
Base money
5.8
4.8
15.2
7.0
34.4
...
...
M2 (period average)
2.7
2.8
2.7
2.5
3.6
...
...
Domestic credit
1.3
1.2
0.6
3.5
4.7
...
...
Bank lending
-0.9
-1.8
0.7
1.3
2.2
...
...
Interest rate
Overnight call rate, uncollateralized (end-period)
0.09
0.08
0.08
0.08
0.07
...
...
Three-month CD rate (annual average)
0.3
0.3
0.3
0.3
0.2
...
...
Official discount rate (end-period)
0.3
0.3
0.3
0.3
0.3
...
...
...
Balance of payments (in billions of US$)
Current account balance
145.3
217.5
127.0
58.7
33.1
59.9
63.9
Percent of GDP
2.9
4.0
2.1
1.0
0.7
1.2
1.3
Trade balance
57.6
108.4
-4.1
-53.5
-89.9
-63.1
-59.5
Percent of GDP
1.1
2.0
-0.1
-0.9
-1.8
-1.3
-1.2
Exports of goods, f.o.b.
546.3
733.6
789.0
776.5
695.0
715.8
766.1
Imports of goods, f.o.b.
-488.8
-625.1
-793.1
-830.0
-784.9
-778.9
-825.6
Oil imports (trade basis)
99.9
134.3
182.5
196.9
184.9
192.4
191.4
FDI, net (percent of GDP)
1.2
1.3
2.0
2.0
2.7
2.2
2.2
Terms of trade (percent change)
19.5
-3.3
-7.5
0.8
-2.9
1.8
-2.3
Change in reserves
27.0
43.2
172.8
-38.2
39.5
-4.5
-7.2
Total reserves minus gold (in billions of US$)
1,022.2 1,061.5 1,258.2 1,227.2 1,237.3
...
...
Exchange rates (annual average)
Yen/dollar rate
93.6
87.8
79.8
79.8
97.6
…
…
Yen/euro rate
130.3
116.5
111.0
102.6
129.6
…
…
Real effective exchange rate (ULC-based) 5/
108.2
109.8
118.5
119.7
96.7
...
...
Real effective exchange rate (CPI-based)
98.9
100.0
101.7
100.3
80.1
...
...
1/ Annual growth rates and contributions are calculated from seasonally adjusted data.
2/ Contribution to GDP growth.
4/ Including the effects of consumption tax increases in 2014 and 2015.
5/ Based on normalized unit labor costs; 2005=100.
Proj.
Sources: Global Insight, Nomura database; IMF, Competitiveness Indicators System; and IMF staff estimates and projections as of
June 20, 2013.
3/ For 2014 export and import growth rates are inflated because of changes in the compilation of BoP statistics
(BPM6) implying a break in the series relative to previous years.
JAPAN
36
INTERNATIONAL MONETARY FUND
Table 2. Japan: General Government Operations, 2010–15
(In percent of GDP)
2010
2011
2012
2013
2014
2015
Est.
Total revenue
29.6
30.8
31.2
31.7
33.0
33.8
Taxes 1/
16.1
16.6
16.8
17.1
17.9
18.8
Social security contributions
11.8
12.5
12.8
13.0
13.2
13.3
Grants
13.5
0.0
0.0
0.0
0.0
0.0
Other revenue
1.7
1.7
1.6
1.7
1.9
1.7
o/w interest income
1.5
1.4
1.3
1.4
1.6
1.5
Total expenditure
38.9
40.6
39.9
40.0
40.0
39.7
Expense
35.0
36.1
36.1
36.1
36.0
36.0
Compensation of employees
6.1
6.3
6.1
…
…
…
Use of goods and services
3.7
3.8
3.8
…
…
…
Consumption of fixed capital
3.0
3.0
3.0
3.0
3.0
2.9
Interest
2.0
2.1
2.1
2.0
1.9
2.0
Grants
13.6
14.9
14.7
…
…
…
Social security benefits
19.7
20.5
20.7
20.8
20.6
20.6
Other expense
-13.2
-14.5
-14.3
…
…
…
Net acquisition of nonfinancial assets
1.0
1.5
0.8
0.9
1.0
0.7
Acquisitions of nonfinancial assets
3.9
4.5
3.8
3.9
4.0
3.6
o/w public investment
3.3
3.1
3.2
3.6
3.7
3.4
o/w land acquisition
0.4
0.3
0.3
0.3
0.3
0.3
Consumption of fixed capital
-3.0
-3.0
-3.0
-3.0
-3.0
-2.9
Net lending/borrowing (overall balance)
-9.3
-9.8
-8.7
-8.3
-7.0
-5.9
Primary balance
-8.6
-9.0
-7.8
-7.6
-6.3
-5.0
Excluding social security fund
-8.2
-9.0
-8.0
-7.6
-6.3
-5.1
Structural balance
-7.8
-8.3
-7.6
-7.8
-6.7
-5.7
Structural primary balance
-7.2
-7.5
-6.7
-7.0
-6.0
-4.9
Financing
9.3
9.8
8.7
8.3
7.0
5.9
Net issuance of debt securities
10.2
8.7
7.4
…
…
…
Other
-0.9
1.2
1.3
…
…
…
Stock positions 2/
Debt
Gross 3/
216.0
231.8
238.8
243.4
243.2
242.7
Net
113.1
127.3
129.5
134.2
136.8
138.4
Net worth
6.5
-3.6
-8.0
…
…
…
Nonfinancial assets
119.6
120.7
119.1
…
…
…
Fixed assets (excluding land)
93.6
95.1
93.9
…
…
…
Land
25.7
25.1
24.7
…
…
…
Other
0.4
0.4
0.5
…
…
…
Net financial worth
-113.1
-124.3
-127.1
…
…
…
Financial assets
102.8
102.1
107.4
…
…
…
Currency and deposits
16.5
16.1
15.9
…
…
…
Loans
6.7
6.7
7.1
…
…
…
Securities other than shares
26.4
25.6
25.4
…
…
…
Shares and other equities
24.0
22.9
24.8
…
…
…
o/w shares
9.4
8.6
10.4
…
…
…
Financial derivatives
0.0
0.0
0.0
…
…
…
Other financial assets
29.3
30.8
34.1
…
…
…
Liabilities
216.0
226.4
234.5
…
…
…
Loans
34.6
34.0
33.9
…
…
…
Securities other than shares
170.2
181.9
189.8
…
…
…
Equities
4.9
5.0
5.0
…
…
…
Financial derivatives
0.0
0.0
0.0
…
…
…
Other liabilities
6.2
5.5
5.8
…
…
…
Memorandum item :
Nominal GDP (CY, trillion yen)
482.4
471.3
473.8
478.0
492.7
505.8
Sources: Japan Cabinet Office; IMF staff estimates and projections.
1/ Including fines.
2/ Market value basis.
3/ Nonconsolidated basis.
Proj.
JAPAN
INTERNATIONAL MONETARY FUND
37
Table 3. Japan: External Sector Summary, 2008–19
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Balance of payments
Current account balance
144
145
217
127
59
33
60
64
71
76
77
89
Trade balance (goods)
56
58
108
-4
-54
-90
-63
-59
-58
-56
-62
-53
Exports of goods
751
546
734
789
776
695
716
766
804
847
890
938
Imports of goods
-695
-489
-625
-793
-830
-785
-779
-826
-862
-903
-951
-991
Services balance
-38.0
-34.9
-33.6
-38.4
-50.6
-35.6
-35.6
-35.6
-35.6
-35.6
-35.6
-35.6
Income balance
138.7
135.0
155.1
183.2
177.1
168.8
168.7
169.1
174.7
178.1
184.7
188.0
Credits
193.5
175.7
201.8
233.8
231.8
222.1
219.0
219.3
227.6
231.9
240.2
244.5
Debits
-54.7
-40.7
-46.7
-50.6
-54.7
-53.3
-50.2
-50.2
-52.9
-53.8
-55.4
-56.5
Current net transfers
-13.1
-12.4
-12.4
-13.9
-14.3
-10.1
-10.0
-10.0
-10.0
-10.0
-10.0
-10.0
Capital account
-5.4
-5.0
-4.9
0.4
-1.0
-7.6
-4.0
-4.1
-4.1
-4.1
-4.1
-4.1
Financial account
210.0
183.1
265.3
182.6
54.2
-73.6
55.9
59.8
67.0
72.2
73.4
85.3
Direct investment, net
86.3
61.2
71.2
116.7
119.1
133.4
105.1
111.1
109.4
116.1
114.2
121.8
Portfolio investment, net
278.5
219.1
150.9
-162.0
40.4
-261.1
9.9
10.2
7.8
7.1
5.0
9.5
Other investment, net
-185.8
-124.3
-0.1
55.1
-67.0
14.6
-54.6
-54.3
-52.1
-51.8
-48.7
-47.8
Reserve assets
31.0
27.0
43.2
172.8
-38.2
39.5
-4.5
-7.2
1.8
0.9
2.8
1.8
Errors and omissions, net
47.7
32.7
41.0
38.4
3.9
-42.2
0.0
0.0
0.0
0.0
0.0
0.0
Current account balance
3.0
2.9
4.0
2.1
1.0
0.7
1.2
1.3
1.4
1.4
1.4
1.5
Trade balance (goods)
1.2
1.1
2.0
-0.1
-0.9
-1.8
-1.3
-1.2
-1.1
-1.0
-1.1
-0.9
Exports of goods
15.5
10.9
13.3
13.3
13.1
14.2
14.8
15.1
15.3
15.5
15.7
16.0
Imports of goods
-14.3
-9.7
-11.4
-13.4
-14.0
-16.0
-16.1
-16.3
-16.4
-16.5
-16.8
-16.9
Services balance
-0.8
-0.7
-0.6
-0.6
-0.9
-0.7
-0.7
-0.7
-0.7
-0.7
-0.6
-0.6
Income balance
2.9
2.7
2.8
3.1
3.0
3.4
3.5
3.3
3.3
3.3
3.3
3.2
Global assumptions
Exchange Rate (¥/US$)
103.4
93.6
87.8
79.8
79.8
97.6
101.7
99.7
98.8
97.4
96.2
95.0
(Percent change)
-12.2
-9.5
-6.2
-9.1
0.0
22.3
4.2
-1.9
-0.9
-1.4
-1.2
-1.3
Oil prices (US$/barrel)
97.0
61.8
79.0
104.0
105.0
104.1
104.1
99.6
95.1
92.3
90.6
89.4
(Percent change)
36.4
-36.3
27.9
31.6
1.0
-0.9
0.1
-4.3
-4.6
-2.9
-1.9
-1.4
Memorandum items :
Nominal GDP (US$ billion)
4,850
5,035
5,495
5,911
5,937
4,900
4,844
5071
5253
5459
5664
5875
Net foreign assets (NFA)/GDP, US$ basis
51
57
56.2
57.8
57.7
69.1
69.9
67.0
64.6
62.2
59.9
57.7
Return on NFA (in percent), US$ basis
5.6
4.7
5.0
5.4
5.2
5.0
5.0
5.0
5.2
5.3
5.4
5.6
Net export contribution to growth
0.2
-2.0
2.0
-0.8
-0.7
-0.2
0.0
0.2
0.1
0.1
0.1
0.1
Sources: Haver Analytics; Japanese authorities; and IMF staff estimates.
Projections
(In billions of U.S. dollars)
(In percent of GDP)
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Table 4. Japan: Medium-Term Projections, 2012–19
2012
2013
2014
2015
2016
2017
2018
2019
Real GDP
1.4
1.5
1.6
1.1
0.9
1.0
1.0
1.1
Total domestic demand
2.3
1.8
1.8
0.8
0.7
0.9
0.9
1.1
Net exports (contribution)
-0.7
-0.2
0.0
0.2
0.1
0.1
0.1
0.1
Unemployment rate (percent)
4.3
4.0
3.9
3.9
4.0
3.9
4.0
4.0
Headline CPI inflation (average)
0.0
0.4
2.8
2.1
2.7
2.0
2.0
2.0
memo item: without planned
consumption tax increases
0.0
0.4
1.1
1.3
1.8
2.0
2.0
2.0
Output gap (in percent of potential output)
-3.1
-2.1
-1.1
-0.7
-0.4
0.0
0.0
0.0
Overall fiscal balance
-8.7
-8.3
-7.0
-5.9
-4.8
-4.6
-4.7
-4.8
Primary balance
-7.8
-7.6
-6.3
-5.0
-3.8
-3.4
-3.2
-3.0
General government debt
Gross
238.8
243.4
243.2
242.7
241.2
240.1
239.0
238.2
Net
129.5
134.2
136.8
138.4
138.8
139.1
139.0
138.9
External current account balance
1.0
0.7
1.2
1.3
1.4
1.4
1.4
1.5
National savings
21.8
21.7
23.1
23.1
23.3
23.8
24.1
24.8
Private
22.7
21.9
21.9
21.1
20.5
21.0
21.4
22.3
Public
-0.9
-0.2
1.2
2.1
2.8
2.8
2.7
2.5
National investment
20.8
21.0
21.9
21.9
21.9
22.4
22.8
23.3
Private
16.3
16.1
16.7
17.2
17.9
18.4
18.9
19.4
Public
4.4
5.0
5.2
4.6
4.1
4.0
3.9
3.8
Sources: Global Insight, Nomura database; and IMF staff estimates.
(Percent change)
(In percent of GDP)
Projections
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Table 5. Japan: FSIs for Deposit-taking Institutions: All Banks
2010
2011
2012
2013
2013
Mar
Mar
Mar
Mar
Sep
Capital adequacy
Total capital ratio 1/2/
13.3
13.8
14.2
14.7
14.9
Tier 1 ratio 1/2/
9.9
10.7
11.3
12.2
12.5
NPL net of provisions/capital 1/3/
22.7
22.2
21.4
19.2
17.8
Asset quality
Non-performing loans (NPL) to total loans ratio 1/3/
2.5
2.4
2.4
2.3
2.1
Sectoral distribution of loans 3/4/
Residents
94.8
94.0
93.8
92.5
91.9
Deposit-takers
8.0
7.7
8.2
9.1
7.3
Central bank
0.0
0.0
0.0
0.0
0.0
Other financial corporations
10.0
9.3
9.5
9.3
9.4
General government
7.1
7.7
7.9
8.1
8.3
Non-financial corporations
35.0
34.4
34.0
32.5
32.7
Other domestic sectors
34.7
34.8
34.2
33.5
34.2
Non-residents
5.2
6.0
6.2
7.5
8.1
Earnings and profitability
Return on assets 1/3/
0.2
0.3
0.3
0.3
0.4
Return on equity 1/3/
5.5
6.9
6.5
7.6
8.9
Interest margin
1.6
1.5
1.5
1.4
1.3
Net interest income/gross income 1/3/
74
70
69
66
64
Non-interest expenses/gross income 1/3/
63
63
63
62
60
Personnel cost/operating cost 1/3/
48
48
…
44
…
Liquidity
Liquid assets/total assets 1/3/
22
23
24
24
22
Liquid assets/short-term liabilities 1/3/
44
45
46
44
41
Loan/deposit 1/3/
77
75
75
75
76
Other
Capital/total assets 1/2/
4.4
4.7
4.7
5.5
5.6
Risk-weighted assets/total assets
49
45
43
42
42
Trading income/total income 1/3/
…
…
…
9.7
…
Gross derivative asset/capital 1/3/
71
61
54
51
41
Gross derivative liability/capital 1/3/
65
57
52
50
40
Sources: Japanese authorities and IMF staff calculations.
1/ Including city banks and regional banks and but not shinkin banks.
2/ Aggregated based on a consolidated basis.
3/ Aggregated based on an unconsolidated basis.
4/ Including all deposit-taking institutions in Japan.
Table 5. Japan: FSIs for Deposit-taking Institutions: All Banks
(In percent)
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Annex I. Japan: New Growth Strategy and Status of Structural
Reforms
Abenomics' Third Arrow: Key Measures and Status
Update of Growth Strategy on June 24, 2014
Policy area
Key measures planned by the authorities and
status
IMF advice
Size of impact if
comprehensive reform
consistent with IMF advice is
Labor Market
Female labor participation
Increase childcare facilities and childcare leave
benefits (implementation ongoing). Removal of
tax and social security disincentives for working
spouses (under discussion). Expanded internship
program for reemployment of women.
Increasing the availability of child
care. Eliminating tax and social
security distortions.
An increase in the FLP rate to
the G-7 average-- combined
with a rise in old age labor
force participation--could raise
potential growth by 0.25
percent per year (Source: 2013
Art. IV Report).
Foreign labor
Relaxation of current points-based preferential
immigration system (under discussion). Expanding
trainee program for immigrant workers in
construction from 2015 (decided). Expanding the
trainee program also for other sectors beyond
construction and including nursing in the program
(under discussion). Use SEZs to encourage use of
foreign human resources (under discussion).
Relaxation of immigration
requirements, especially, in
sectors with labor shortages.
Immigration equivalent to a rise
of Japan's labor force by 1
percent distributed over a
decade could increase potential
growth by 0.1-0.2 percent per
year (2013 Art. IV).
Reducing Labor Duality
Encourage use of 'limited regular' contracts to
reduce labor market duality and increase
productivity (under discussion). Expand subsidies
for job mobility (decided from budget 2015).
Discussion underway to ease non-regular work
rules (Bills related to dispatched workers and fixed-
term workers submitted to the current Diet).
Implementing steps to reduce
labor market duality and increase
productivity, including clarifying
the legal framework for limited
regular contracts.
Substantial reduction in labor
market duality would increase
productivity and would be
likely to have a substantial
impact on potential growth,
but difficult to quantify (Aoyagi
and Ganelli IMF WP 13/202).
Deregulation
Special Economic Zones
(deregulation)
Six areas designated on March 28, 2014--
including Tokyo and Osaka--accounting for about
40 percent of GDP. Expected deregulation
includes easing restrictions on land use and
medical practices, agriculture reform, and
creation of new businesses. SEZs are expected to
propose specific measures--to be vetted by a
national committee--in the near future.
Using SEZs as a laboratory for
reforms to be implemented at
the national level.
Unlikely to have a significant
growth effect in short term.
Potentially laboratory for
country-wide reform.
Agricultural reform
Land banks to increase farm size established.
Review of rice production adjustments ongoing
(
gentan system to end by FY 2018). Various
strategies for opening of agricultural markets
being discussed.
Fully deregulating agriculture to
raise productivity and
competition.
Full deregulation in agriculture
could boost productivity by up
to 30 percent albeit sector size
is small in percent of GDP (IMF
estimates).
On June 24, the Abe cabinet approved a revised growth strategy, which lays out a roadmap for further “3rd arrow”
reforms. The strategy lists a menu of measures with many details to be defined. Key measures include plans to
reduce the corporate income tax rate from over 35 percent to below 30 percent (size, timeframe and financing under
discussion) and further corporate governance reforms to encourage a more productive use of corporate savings. The
strategy also mentions labor market reforms by possibly removing tax disincentives for women to work, greater use
of foreign labor in health and household services, and measures to incentivize a shift from overtime- to performance-
based remuneration. Few concrete measures were announced on agricultural reform or the role of Special Economic
Zones.
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Policy area
Key measures planned by the authorities and
status
IMF advice
Size of impact if
comprehensive reform
consistent with IMF advice is
Deregulation
Electricity sector reform
First fundamental reform in 60 years to be
completed by 2020, including (i) a gradual
opening of grid, (ii) liberalization of the retail
electricity sector, and (iii) legal separation
between electricity generators and distributors
and abolish retail price regulation. Legislation
regarding part (i) and (ii) passed.
Likely to have a substantial
impact on potential growth.
Economic impact difficult to
quantify.
Business Sector
Corporate governance
reform
Published Japan’s Stewardship code for
institutional investors, which 127 institutional
investors have agreed to adopt as of end May
2014. Current Diet session amended the
Companies Act with measures which would
strengthen corporate governance, including by
strengthening audit functions and introducing
outside independent directors on a "comply or
explain" basis. Introduction of a corporate
governance code for firms (under discussion).
Implementing comprehensive
corporate governance reform,
including by complementing the
Stewardship Code for
institutional investors with a
corporate governance code for
firms, and adopting measures to
expand the use of outside
directors beyond current plans.
More efficient corporate
decision making by raising
shareholders' power could
result in unlocking excessive
corporate savings. Economic
impact difficult to quantify but
likely to be substantial (see
Aoyagi and Ganelli 2014,
forthcoming IMF WP).
Corporate taxation
Reduction of corporate tax rate (from 34.6
percent) with offsetting measures (intention to go
ahead publicly announced by PM Abe but with
details to be specified later). Government internal
discussions ongoing about elimination/reduction
of existing tax incentives.
CIT reform is desirable as part of
a comprehensive medium term
fiscal consolidation package.
CIT rate cut is likely to be good
for investment and growth, but
not self-financing, so
compensatory measures will
need to be identified.
Trade
Trade negotiations (TPP)
Started participating in negotiation of the
ambitious 12-nation free trade plan in July, 2013:
More negotiating to do after multi-lateral talks
failed in Singapore in February, 2014. Japan-US
remain far apart on the issue of tariff
reduction/elimination of Japan’s “sacred”
agricultural products.
Joining the TPP Agreement and
use it as an opportunity to
deregulate protected sectors.
Comprehensive deal: 0.1- 0.2
higher growth p.a. (Peterson
Institute)
Financial Sector
Financial sector reform
GPIF to shift away from JGBs towards other assets
(proposed in November 2013). New stock market
index including only profitable companies
(launched in January 2014). Tax-free investment
accounts (NISA) to encourage shifting household
savings away from cash (launched in January
2014).
Phasing out the full credit
guarantees to SMEs.
Strengthening capital standards
of domestic banks and
monitoring of risks from overseas
activities of internationally active
banks.
Financial sector reforms that
raise risk capital and induce a
restructuring of the SME
sectors could lift long-term
growth by about 0.2
percentage points (Source:
2013 Art. IV Report).
Wage Policy
Coordination of wage
setting
Tripartite Commission. Tax incentives for
increasing wages introduced in 2013.
Tax incentives could be expanded
and better targeted. A higher
than usual increase in the
minimum wage could be
considered to raise base wages.
Likely to have a substantial
impact on short term growth
and help Abenomics transition
to a private-sector lead phase.
Source: Staff estimates.
Degree of progress of reforms: Significant
Medium progress
Limited progress
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Annex II. Japan: Risk Assessment Matrix1
Overall Level of Concern
Likelihood (Over next 1–3 years)
Impact and Policy Response
➢
Successful
reflation following
comprehensive
reforms
Medium
Aggressive monetary policy easing
and a credible medium-term fiscal
and growth strategy could lead to a
virtuous cycle of high growth and
positive inflation.
High
Increased inflation expectations would help lowering expected real rates and
thereby stimulate activity as well as leading to sustained 2-percent inflation.
It would improve debt dynamics, minimizing the negative effect of
consolidation on growth.
Policy response: The BoJ should prepare a credible exit strategy and the
government should save any fiscal overperformance.
➢
Protracted
period of slower
growth in
advanced and
emerging
economies
High
The recovery in the U.S. could be
weaker than expected, while the
recovery is much more subdued in
the euro area. EMs may not recover
back to their pre-crisis growth
paths. Implementation of Japan’s
three-pronged recovery strategy
could be less successful.
High
GRAM simulations show that Japanese GDP growth could be lower by
2–3 percent relative to the baseline.
Policy response: The BoJ’s QQE could be recalibrated, including the pace and
composition of asset purchases. If the authorities commit to a concrete and
credible fiscal consolidation plan by passing concrete measures, the 2014–
15 fiscal withdrawal could be made more gradual, but the second round of
consumption tax increase should proceed as planned.
➢
Bond market
stress from a
reassessment in
sovereign risk in
Japan
Medium
Disappointing growth reforms and
lack of concrete fiscal measures to
bring down public debt could
trigger a significant rise in the risk
premium.
High
The 2012 FSAP Update indicates that an increase in the sovereign risk
premium by 200bps could undermine financial stability and worsen debt
dynamics.
Policy response: BoJ bond purchases should be increased, fiscal adjustment
frontloaded, and ambitious structural reforms implemented to contain risks.
The government should confirm the second-round of the consumption tax
increase.
➢
Surges in global
financial market
volatility,
triggered by
revised market
expectations on
UMP exit
High
Bouts of market volatility and
higher-than-expected increases in
long-term rates could occur as a
result of AEs’ exiting from
unconventional monetary policy.
Low
Strong growth in the U.S. would support exports and a widening of the
interest rate differential would facilitate portfolio rebalancing. However,
these effects would be offset by safe-haven effects, lower exports to EMs,
and falling confidence.
Policy response: The BoJ could recalibrate the QQE depending on market
developments. Bold implementation of structural reforms is important to
boost domestic demand and maintain confidence.
➢
A sharp
increase in
geopolitical
tensions
surrounding
Russia/Ukraine
Medium
Doubts about whether Ukraine will
consistently make timely
commercial and financial payments,
both internally and externally;
financial and trade disruptions;
contagion; a further slowdown in
Russia; and uncertainty all trigger a
re-pricing of risks and heightened
volatility in financial markets.
Low
While financial and trade linkages with Eastern Europe are weak, Russia is an
important source of mineral fuel imports. If global oil and gas prices
increase by 15 and 10 percent, respectively, the trade balance would
deteriorate by about 0.6 percent of GDP in 2014. Furthermore, the yen
could strengthen from safe-haven effects undermining exports and
progress on inflation.
Policy response: Ambitious structural reforms are important to boost
domestic demand and confidence. Albeit small, automatic stabilizers should
be allowed to operate. The pace of BoJ asset purchases could be
accelerated.
➢
Disruptions
triggered by
geopolitical
incidents in East
Asia
Low
An incident in the East China Sea
could lead to disruptions in financial
flows, and possibly trade routes
with a direct impact on global
market sentiment and a flight to
safety.
Medium
The already subdued recovery of exports would stall not only due to close
trade links with neighboring economies but also due to potential yen
appreciation on safe-haven effects.
Policy response: If the authorities commit to a credible fiscal consolidation
plan by passing concrete measures, the near-term fiscal withdrawal could be
made more gradual. Ambitious structural reforms are important to boost
domestic demand and the pace of BoJ asset purchases could be accelerated.
1 The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the
view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“low” is
meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability of 30 percent
or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities.
Non mutually exclusive risks may interact and materialize jointly.
Annex III. Assessment of Japan’s External Sector
Japan
Overall Assessment
Foreign asset and
liability position and
trajectory
Background. The net international investment position (NIIP) position has risen to over 60 percent of GDP in 2013 (from 35 percent
ten years ago). In the medium term, despite likely valuation effects, it is projected to stabilize around 70 percent of GDP, in light of
the outlook for the current account, as private saving declines with aging.
Assessment. Vulnerabilities are limited. Japan’s positive NIIP generates sizable investment income (average 3 percent of GDP over
the past five years). Risks on assets and their returns are also diversified geographically and in terms of investment type.
Overall Assessment:
The external position is
broadly consistent with
medium-term fundamentals
and desirable policies.
However, a large degree of
uncertainty around specific
estimates must be
acknowledged.
Potential policy
responses:
Policy gaps for Japan are
primarily of internal rather
than external sustainability.
Full implementation of the
fiscal and structural reform
arrows of Abenomics is
needed to close the policy
gaps. Fiscal consolidation
would raise national
savings above the baseline
forecast, more than
offsetting the decline in
private saving from aging,
and raise the current
account surplus. Ambitious
structural reforms including
liberalizing trade through
the approval of trade
agreements could partially
offset this by boosting
productivity, domestic
income, and imports.
Current account
Background. The 2013 current account (CA) surplus narrowed to 0.7 percent of GDP (0.8 percent cyclically-adjusted). Despite the
yen depreciation, exports recovered only sluggishly due to a combination of a higher share of overseas production, competitiveness
problems in traditional strongholds such as consumer electronics, and slow pass-through of the depreciation to lower export prices.
Imports remained elevated as a result of temporarily high demand for fossil fuels and greater import penetration in certain areas,
such as handsets. In 2014, the current account is projected to rise to 1.2 percent of GDP as exports recover and the fiscal deficit
declines, although energy imports are likely to remain high in the near-term.
Assessment. Correcting for temporarily higher energy imports, delayed effects of depreciation on the trade balance, and elevated
rush demand for imports ahead of the 2014 consumption tax hike, staff estimates the underlying, cyclically-adjusted CA to be about
1-1 ¼ percentage point higher than estimated by the EBA CA regression model. Adjusting for the full impact of the new macro
policy framework under Abenomics and structurally lower export elasticities, staff estimates the CA norm to be 2 percent of GDP,
just under 1 percentage point lower than the EBA estimate (see notes 1,2,3 in technical background). Staff assesses the underlying
CA to be in line with fundamentals and desirable policies (compared to the EBA estimated gap: 2 percent). Uncertainties around the
assessment suggest a wide range of +/-1½ percent of GDP around a midpoint of zero (see note 4, in technical background).
Real exchange rate Background. After having depreciated by close to 20 percent between 2012 and 2013, the real effective exchange rate (REER)
depreciated by another 5 percent by May 2014 relative to the average value in 2013. This is in part due to a sustained trade deficit
and widening long term interest rate differentials relative to the U.S. (related to asynchronous stances of the U.S. Federal Reserve and
the Bank of Japan).
Assessment. The EBA REER regression model assesses the 2013 average REER to be 14 percent weaker compared to the level
consistent with fundamentals and desirable policies, primarily from a large unexplained residual while the policy gap is close to zero
(the specification does not include fiscal P*). The EBA REER model however does not capture e unusual factors affecting the REER –
large short speculative positions against the currency used to hedge long equity exposures in the domestic stock market, temporarily
higher energy imports, and a sudden widening of long-term sovereign spreads relative to other advanced economies. There is
therefore a high degree of uncertainty in the model estimates. Instead, using the CA gap range as reference, staff assess a midpoint
of zero with indicative ranges of -15 percent undervaluation to +15 percent overvaluation for 2013. (see notes 4 and 5 in technical
background).
Capital and financial
accounts:
flows and policy
measures
Background. The appreciation and recent depreciation of the yen since the global financial crisis have not been associated with
notable capital in- or outflows. Instead, the main driver of exchange rate movements appears to be the derivative position, reflecting
hedging as well as speculative positions. The scale of the new monetary easing policy could result in some spillovers, notably a larger
flow of capital to the region’s other economies.
Assessment. Safe haven flows imply limited vulnerabilities to global financial instability.
FX intervention and
reserves level
Background. Reserves are higher than in other reserve asset issuers (about 20 percent of GDP) on legacy accumulation. The
exchange rate is free floating and the level of the yen is market determined.
Assessment. Staff assess isolated foreign exchange interventions during safe haven periods as directed toward reducing short-term
volatility, with ambiguous effects on the level of the exchange rate.
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Technical
Background Notes
1/ The new macro policy framework under Abenomics will translate into higher domestic demand, inflation, and productivity, which
lead to a smaller required fiscal adjustment than under the EBA CA model – i.e. the policy gap is smaller than estimated by EBA.
2/ Export elasticities are structurally lower because offshoring of production and a higher share of intermediate goods exports makes
Japanese exports less sensitive to yen fluctuations than in the past.
3/ The norm is positive because of high corporate saving in excess of domestic investment opportunities, low residential investment,
and a sizable income account owing to the large NFA position and favorable return differential on assets relative to liabilities.
4/ Large bands around the CA midpoint estimate are the result of three factors, each contributing about ½ a percent of GDP to the
+/- 1.5 percent of GDP range: (i) varying estimates of the reversal of temporary effects on the underlying current account balance, in
particular fossil fuel imports; (ii) difficult to quantify CA implications of Abenomics policies via higher growth and productivity and
the effects on fiscal adjustment needs; and (iii) uncertain long-run trade balance effects of structural changes, such as increased
overseas production and reduced competitiveness of tradables in some sectors. Ranges around these adjustments to the CA
balance are assumed to be symmetric and not correlated with each other.
5/ This large range for the REER gap is associated with a narrow range for the CA gap because lower trade elasticities have reduced
the sensitivity of the CA to REER changes.
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Annex IV. Japan: Main Recommendations of the 2013 Article IV
Consultation
Fund Recommendations
Policy Actions
Fiscal Policy:
Implementation of the consumption tax rate increase to 10 percent
by October 2015 while avoiding multiple rates.
The consumption tax rate was increased to 8 percent in
April.
An ambitious and concrete consolidation plan beyond 2015 to
bring public debt firmly on downward path. The medium-term fiscal
plan should be as growth friendly as possible, including:
•
Increasing the consumption tax gradually to a uniform rate of
at least 15 percent.
•
Broadening the personal income tax base, including by
reducing the exemption for pension income and eliminating
tax deduction for dependent spouses.
•
Lowering the corporate tax rate to improve investment
incentives and reducing payroll tax to simulate labor effort.
•
Reducing pension spending by raising pension retirement age
to 67, collecting contributions from dependent spouses, and
clawing back benefits from wealthy retirees.
•
Strengthening the fiscal framework by adopting medium-term
rules to curb expenditure and limiting the conditions under
which supplementary budgets can be used.
The Diet passed a supplementary budget in early 2014 to
support near-term growth (1.2 percent of GDP over two
years).
In March 2014 the Diet repealed a temporary increase of
the corporate tax rate and brought the corporate income
tax rate back to 34.6 percent (by about 3 ppt).
Monetary Policy:
The BoJ should continue with QQE but recalibrate its easing policies
in the event inflation does not pick up or JGB market volatility rises.
The BoJ should begin planning early to address exit risks, including
considering indemnification against capital losses on bond
holdings.
The BoJ maintains the pace of asset purchases under its
QQE framework.
In March 2014, The BoJ extended the loan support
program by another one year and doubled the size of its
funding amount.
Financial Sector Policy:
Strengthening capital standards for domestically oriented banks by
including unrealized losses from capital adequacy ratio (FSAP
update).
Mitigating foreign-exchange funding risks for banks with overseas
activities by raising deposits overseas and by issuing long-term
foreign-denominated debt.
Assessing the solvency of insurers on economic valuation (FSAP
update).
The FSA strengthened CAR standards from March 2014,
which will raise the quality of capital by setting "core-
capital" as regulatory capital, while keeping the minimum
ratio of 4 percent.
The authorities are monitoring forex funding risks,
including through frequently checking liquidity positions.
The BoJ established cross-border collateral arrangements
with Singapore and Thailand, and agreed to establish
one with Indonesia, to help reduce local-currency
funding risks in overseas markets.
Growth Strategy
Deregulating agriculture and domestic services sectors to raise
productivity and competition, and to encourage inward foreign
investment.
Enhancing the dynamism of the SME sector, including by phasing
out costly government support measures (e.g., full value credit
guarantees) and increasing risk capital for start-ups.
Implementing steps to reduce labor market duality and increase
flexibility, including clarifying the legal framework for limited
regular (“gentei seishain”) contracts.
Building on the recent relaxation of immigration requirements by
expanding it to areas where there are labor shortages, such as in
long-term nursing care.
The Diet approved several bills, including ones to
designate national strategic special zones, facilitate
farmland consolidation, and reform the electricity sector
and employment system (see Annex I). On June 24, the
government unveiled an update of its growth strategy.
Main measures included plans to lower the corporate
income tax rate and further corporate governance
reforms.
JAPAN
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INTERNATIONAL MONETARY FUND
Annex V. Japan: Debt Sustainability Analysis
Assumptions. The analysis is based on the following key macroeconomic projections and policy
assumptions (Table 4): real growth is projected to slow to 1 percent during 2015–19 and then
remain at that level beyond the medium-term assuming moderate gains from currently approved
structural policies. Monetary policy is assumed to remain accommodative until the 2 percent
inflation target is reached in a stable manner around 2017/18. Fiscal policy assumes the
implementation of the second stage of the consumption tax rate increase, but only small further
adjustments after 2015. As a result, long-term interest rates are projected to pick up with rising
inflation expectations to 3.5 percent on new bond issuances, but because of the average maturity of
government bonds of around 6.5 years (including financing bills), the nominal effective interest rate
on public debt is lower and rises gradually to 1.7 percent in 2019, implying an interest-growth
differential of -0.7 with nominal GDP growth rate of 2.4 percent. As a result, the overall fiscal balance
will remain around 4.6–4.8 percent of GDP during 2016–19 with a slowly improving primary balance
and rising interest payments.
Assessment. Japan’s public debt is unsustainable under the current policy settings. Although the
gross debt to GDP ratio is projected to stabilize at around 240 percent of GDP during the WEO
projection period due to a declining primary deficit and a favorable differential between interest and
growth rates compared to past values, complementary analysis covering up to 2030 shows that the
debt ratio will start increasing again in 2020, reaching around 280 percent of GDP in 2030. The net
debt to GDP ratio is assumed to move in a similar way, although it is lower by around 100 percent of
GDP, reflecting Japan’s large financial assets.
Financing Needs. Japan’s gross financing needs (defined as the public sector deficit, plus all
maturing debt) were 55 percent of GDP in 2014, the highest among the advanced economies. As the
primary deficit declines, the gross financing needs are estimated to fall as well, although they remain
exceptionally large at 52 percent of GDP in 2019. Although the government intends to lengthen the
average maturity of JGBs, as no specifics have been provided, a similar maturity structure to the one
in 2014 is assumed for the projection period.
Debt Profile. The debt financing conditions are helped in the medium-term by a number of factors.
The 10-year bond yield has been at a record low and its spread against the US is negative at
around 200 basis points. The external financing requirement, incorporating the current account
surplus, is well below the lower threshold at 9 percent of GDP. This reflects the fact that foreign
holding of JGBs is quite low at 7 percent. In addition, there are no direct risks related to exchange
rates as no debt is denominated in foreign currencies, which is also assumed for the future.
Net Debt. Given the large financial assets held by the government, net debt is also an important
indicator for Japan. It should be noted, however, that not all the financial assets are available for
debt repayment or easy to liquidate as for example, they include assets for future pension payments.
The financial-assets-to-GDP ratio is assumed to gradually decline from 109 percent in 2012 to
99 percent in 2019 partly due to scheduled asset sales to fund part of earthquake reconstruction
JAPAN
INTERNATIONAL MONETARY FUND
47
spending. Therefore, the net-debt-to-GDP ratio is projected to increase more than the gross ratio
during 2012–19.
Realism of Baseline Assumptions.
➢ Past assumptions on real growth1 have not been too optimistic or pessimistic compared to peer
countries. Although past projections of the GDP deflator were on the optimistic side, the
difference with actual values is small.
➢ Past assumptions on the primary balance have been neither too optimistic nor pessimistic. The
size of Japan’s 3-year adjustment on a cyclically adjusted primary balance (CAPB) basis is in the
top quintile of the historical experience for high-debt market access countries, but the CAPB
level is on the lowest end (large deficit). Staff believes that the pace of fiscal consolidation
in 2014–16 of around 1 percentage point of GDP per annum is appropriate, balancing the high
deficit and debt on one hand, with the need to end deflation and revive growth on the other.
➢ Implicit growth without fiscal adjustment is higher than potential for the projection period, but
this is due to supportive monetary easing and the confidence effect that fiscal consolidation is
assumed to bring about. Here the fiscal multiplier is assumed to be 0.5, which is lower than the
default value of 1. The reasons for this include that about half of the fiscal consolidation is
assumed to come from revenue measures (mainly consumption tax increases), there are partly
offsetting rate reductions in more distortionary taxes, while expenditure reductions are
recommended to take place in areas with relatively lower multipliers such as pension payments
to the wealthy.
1 Optimistic growth projections for 2011 are mainly due to the earthquake.
JAPAN
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INTERNATIONAL MONETARY FUND
Japan: Public DSA Risk Assessment
Japan
Source: IMF staff.
1/ The cell is highlighted in green if debt burden benchmark of 85% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not
baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.
Real Interest
Rate Shock
External
Financing
Requirements
Real GDP
Growth Shock
Heat Map
Upper early warning
Evolution of Predictive Densities of Gross Nominal Public Debt
(in percent of GDP)
Debt profile 3/
Lower early warning
(Indicators vis-à-vis risk assessment benchmarks, in 2013)
Debt Profile Vulnerabilities
Gross financing needs 2/
Debt level 1/
Real GDP
Growth Shock
Primary
Balance Shock
3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark,
yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white.
Lower and upper risk-assessment benchmarks are:
Change in the
Share of Short-
Term Debt
Foreign
Currency
Debt
Public Debt
Held by Non-
Residents
Primary
Balance Shock
Real Interest
Rate Shock
Exchange Rate
Shock
Contingent
Liability Shock
Exchange Rate
Shock
Contingent
Liability shock
5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external
debt at the end of previous period.
4/ Long-term bond spread over U.S. bonds, an average over the last 3 months, 25-Mar-14 through 25-Jun-14.
2/ The cell is highlighted in green if gross financing needs benchmark of 20% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock
but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.
400 and 600 basis points for bond spreads; 17 and 25 percent of GDP for external financing requirement; 1 and 1.5 percent for change in the share of short-term debt; 30
and 45 percent for the public debt held by non-residents.
Market
Perception
1
2
Not applicable
for Japan
400
600
-202
bp
1
2
17
25
9%
1
2
1
1.5
-
1.6%
1
2
Bond spread
External Financing
Requirement
Annual Change in
Short-Term Public
Debt
Public Debt in
Foreign Currency
(in basis points) 4/
(in percent of GDP) 5/
(in percent of total)
(in percent of total)
200
210
220
230
240
250
260
270
280
2012
2013
2014
2015
2016
2017
2018
2019
10th-25th
25th-75th
75th-90th
Percentiles:
Baseline
Symmetric Distribution
200
210
220
230
240
250
260
270
280
2012
2013
2014
2015
2016
2017
2018
2019
Restricted (Asymmetric) Distribution
no restriction on the growth rate shock
no restriction on the interest rate shock
0 is the max positive pb shock (percent GDP)
no restriction on the exchange rate shock
Restrictions on upside shocks:
30
45
7%
1
2
Public Debt Held
by Non-Residents
(in percent of total)
Japan: Public DSA – Realism of Baseline Assumptions
JAPA
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49
JAPAN
50
INTERNATIONAL MONETARY FUND
Japan: Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario
(in percent of GDP unless otherwise indicated)
As of June 25, 2014
2/
2012 2013
2014 2015 2016 2017 2018 2019
Sovereign Spreads
Nominal gross public debt
195.0
238.8 243.4
243.2 242.7 241.2 240.1 239.0 238.2
EMBIG (bp) 3/
-199
Public gross financing needs
58.1
57.8
54.8
55.9
54.7
53.3
52.5
52.3
5Y CDS (bp)
37
Net public debt
93.9
129.5 134.2
136.8 138.4 138.8 139.1 139.0 138.9
Real GDP growth (in percent)
0.8
1.4
1.5
1.6
1.1
0.9
1.0
1.0
1.1
Ratings
Foreign Local
Inflation (GDP deflator, in percent)
-1.4
-0.9
-0.6
1.4
1.6
1.8
1.4
1.5
1.3
Moody's
Aa3
Aa3
Nominal GDP growth (in percent)
-0.6
0.5
0.9
3.1
2.7
2.7
2.4
2.5
2.4
S&Ps
AA-u AA-u
Effective interest rate (in percent) 4/
1.0
0.9
0.8
0.8
0.8
1.0
1.2
1.4
1.7
Fitch
A+
A+
2012 2013
2014 2015 2016 2017 2018 2019 cumulative
Change in gross public sector debt
7.5
7.0
4.6
-0.2
-0.4
-1.5
-1.1
-1.1
-0.8
-5.1
Identified debt-creating flows
9.3
8.7
7.4
1.0
0.7
-0.2
0.5
0.8
1.4
4.2
Primary deficit
6.1
7.8
7.6
6.3
5.0
3.8
3.4
3.2
3.0
24.7
Primary (noninterest) revenue and grants 28.3
30.0
30.5
31.8
32.6
33.7
33.7
33.8
33.8
199.4
Primary (noninterest) expenditure
34.4
37.8
38.0
38.1
37.7
37.5
37.2
37.0
36.8
224.1
Automatic debt dynamics 5/
3.2
0.9
-0.1
-5.3
-4.3
-4.0
-2.9
-2.4
-1.6
-20.6
Interest rate/growth differential 6/
3.2
0.9
-0.1
-5.3
-4.3
-4.0
-2.9
-2.4
-1.6
-20.6
Of which: real interest rate
4.5
4.2
3.5
-1.5
-1.8
-1.9
-0.5
-0.1
1.1
-4.8
Of which: real GDP growth
-1.3
-3.3
-3.6
-3.8
-2.5
-2.0
-2.4
-2.3
-2.6
-15.7
Exchange rate depreciation 7/
0.0
0.0
0.0
…
…
…
…
…
…
…
Other identified debt-creating flows
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Contingent liabilities
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Other debt-creating flows
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
Residual, including asset changes 8/
-1.8
-1.7
-2.9
-1.2
-1.2
-1.3
-1.6
-1.9
-2.2
-9.3
Source: IMF staff.
1/ Public sector is defined as general government.
2/ Based on available data.
3/ Long-term bond spread over U.S. bonds.
4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.
5/ Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate;
a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).
6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.
7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).
8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.
9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
-1.6
balance 9/
primary
Debt, Economic and Market Indicators 1/
2003-2011
Actual
Projections
Contribution to Changes in Public Debt
Projections
2003-2011
Actual
debt-stabilizing
-15
-10
-5
0
5
10
15
20
25
30
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Debt-Creating Flows
Primary deficit
Real GDP growth
Real interest rate
Exchange rate depreciation
Other debt-creating flows
Residual
Change in gross public sector debt
projection
(in percent of GDP)
-40
-30
-20
-10
0
10
20
30
cumulative
JAPAN
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51
Japan: Public DSA – Composition of Public Debt and Alternative Scenario
Baseline Scenario
2014
2015
2016
2017
2018
2019
Historical Scenario
2014
2015
2016
2017
2018
2019
Real GDP growth
1.6
1.1
0.9
1.0
1.0
1.1
Real GDP growth
1.6
0.8
0.8
0.8
0.8
0.8
Inflation
1.4
1.6
1.8
1.4
1.5
1.3
Inflation
1.4
1.6
1.8
1.4
1.5
1.3
Primary Balance
-6.3
-5.0
-3.8
-3.4
-3.2
-3.0
Primary Balance
-6.3
-6.3
-6.3
-6.3
-6.3
-6.3
Effective interest rate
0.8
0.8
1.0
1.2
1.4
1.7
Effective interest rate
0.8
0.8
1.6
2.0
2.5
2.9
Constant Primary Balance Scenario
Real GDP growth
1.6
1.1
0.9
1.0
1.0
1.1
Inflation
1.4
1.6
1.8
1.4
1.5
1.3
Primary Balance
-6.3
-6.3
-6.3
-6.3
-6.3
-6.3
Effective interest rate
0.8
0.8
1.0
1.2
1.4
1.7
Source: IMF staff.
Underlying Assumptions
(in percent)
Alternative Scenarios
Composition of Public Debt
Baseline
Historical
Constant Primary Balance
Net debt (in
percent of
GDP)
0
50
100
150
200
250
300
2012
2013
2014
2015
2016
2017
2018
2019
Gross Nominal Public Debt
(in percent of GDP)
projection
40
45
50
55
60
65
70
2012
2013
2014
2015
2016
2017
2018
2019
Public Gross Financing Needs
(in percent of GDP)
projection
0
50
100
150
200
250
300
2003
2005
2007
2009
2011
2013
2015
2017
2019
By Maturity
Medium and long-term
Short-term
projection
(in percent of GDP)
0
50
100
150
200
250
300
2003
2005
2007
2009
2011
2013
2015
2017
2019
By Currency
Local currency-denominated
Foreign currency-denominated
projection
(in percent of GDP)
JAPAN
52
INTERNATIONAL MONETARY FUND
Shocks and Stress Tests
➢
Fan chart. The fan chart, which incorporates feedback effects between macroeconomic variables
and relies on historical data to calibrate shocks, illustrates additional risks around the baseline.
For example, under the worst quartile case, the debt to GDP ratio could reach around
250 percent of GDP in 2019, more than 10 percentage points higher than in the baseline.
➢
Primary balance shock. The impact is estimated to be modest. The improvement in the primary
balance underperforms by half of the 10-year historical standard deviation of changes in the
primary balance, compared to the baseline. Additional borrowing cost of 25 basis points per
1 percent of GDP worsening of the deficit is assumed. The gross debt to GDP ratio will be higher
by around 3 percent of GDP in 2019 than the baseline.
➢
Growth shock. The impact on the debt ratio is the second largest among the shock scenarios.
Real output growth rates are lower by a half of the 10-year historical standard deviation of
changes in growth, compared to the baseline, for 2 years starting in 2015. As a result, the
primary balance deteriorates, leading to higher interest rates as in the primary balance shock
scenario. Also, a decline in inflation is assumed at a rate of 0.25 percentage point per 1 point
decrease in growth. The impact is relatively large, bringing the debt ratio to around 255 percent
of GDP, around 10 percentage point increase relative to the baseline.
➢
Interest rate shock. The effect becomes larger with the passage of time. A spike in JGB yields is
an important medium-term tail risk. A shock of 200 basis points is assumed to happen in 2014
and stay for the rest of the period. Although increasing only gradually due to the average
maturity of around 6.5 years, the effective interest rate is higher by around 1 percentage point
in 2019 than the baseline, with the debt ratio higher by around 7 points. The difference with the
baseline does not look very large, but such a shock could have a material effect on the financial
sector with possible knock-on effects on the debt ratio and could lead to distress in the financial
sector (see next shock).
➢
Interest rate and contingent liability shock. The impact is by far the largest among the scenarios.
A one-time capital injection equivalent to 2.5 percent of banking sector assets (approximately
10 percent of regional banks assets) will increase government spending by 3.4 percent of GDP.
The interest rate is assumed to rise by 25bp each percentage point increase in the primary
deficit. This is also combined with real GDP growth shock. As a result, the debt ratio will increase
to around 260 percent of GDP in 2019, more than 20 percentage points higher than in the
baseline.
Longer-term Projections and Risks. Despite the relatively stable fiscal outlook in the medium term,
the gross and net debt to GDP ratios are projected to start increasing in 2020 and reach around
280 percent and 180 percent of GDP, respectively (see text chart on page 14). This increase is a
reflection of a gradual rise in the interest rate-growth differential towards the historical average
JAPAN
INTERNATIONAL MONETARY FUND
53
of 1.1
2 One important downside risk is a larger increase in public health spending than assumed in
the baseline (Kashiwase, Nozaki, and Saito 2014). Maintaining the same macroeconomic
assumptions as in the baseline, this would imply a debt ratio of 295 percent of GDP, about
15 percentage points higher than in the baseline. Another downside risk stems from possible
macroeconomic shocks. Stochastic simulations, using a similar method to the one for the fan charts
above, show that even with the recommended fiscal adjustment over the medium term, the debt
ratio will remain at a high level with a 25 percent probability.
2
The differential is currently lower than the historical average, estimated at around 0 in 2013, partly reflecting
exceptional monetary easing.
JAPAN
54
INTERNATIONAL MONETARY FUND
Japan: Public DSA – Stress Tests
Primary Balance Shock
2014
2015
2016
2017
2018
2019
Real GDP Growth Shock
2014
2015
2016
2017
2018
2019
Real GDP growth
1.4
1.0
0.7
1.0
1.0
1.1
Real GDP growth
1.4
-0.4
-0.7
1.0
1.0
1.1
Inflation
1.6
1.0
0.9
1.4
1.4
1.3
Inflation
1.6
0.7
0.6
1.4
1.4
1.3
Primary balance
-6.4
-6.6
-5.4
-3.6
-3.4
-3.1
Primary balance
-6.4
-5.9
-5.3
-3.6
-3.4
-3.1
Effective interest rate
0.8
0.9
1.1
1.3
1.5
1.8
Effective interest rate
0.8
0.9
1.0
1.3
1.5
1.8
Real Interest Rate Shock
Real Exchange Rate Shock
Real GDP growth
1.4
1.0
0.7
1.0
1.0
1.1
Real GDP growth
1.4
1.0
0.7
1.0
1.0
1.1
Inflation
1.6
1.0
0.9
1.4
1.4
1.3
Inflation
1.6
1.7
0.9
1.4
1.4
1.3
Primary balance
-6.4
-5.2
-4.0
-3.6
-3.4
-3.1
Primary balance
-6.4
-5.2
-4.0
-3.6
-3.4
-3.1
Effective interest rate
0.8
0.9
1.4
1.8
2.2
2.6
Effective interest rate
0.8
0.9
1.0
1.2
1.4
1.7
Combined Shock
Contingent Liability Shock
Real GDP growth
1.4
-0.4
-0.7
1.0
1.0
1.1
Real GDP growth
1.4
-1.7
-2.0
1.0
1.0
1.1
Inflation
1.6
0.7
0.6
1.4
1.4
1.3
Inflation
1.6
0.4
0.3
1.4
1.4
1.3
Primary balance
-6.4
-6.6
-6.0
-3.6
-3.4
-3.1
Primary balance
-6.4
-8.6
-4.0
-3.6
-3.4
-3.1
Effective interest rate
0.8
0.9
1.5
1.8
2.2
2.7
Effective interest rate
0.8
0.9
1.2
1.5
1.8
2.1
Source: IMF staff.
(in percent)
Real Exchange Rate Shock
Combined Macro-Fiscal Shock
Additional Stress Tests
Baseline
Underlying Assumptions
Contingent Liability Shock
Macro-Fiscal Stress Tests
Baseline
Primary Balance Shock
Real GDP Growth Shock
Real Interest Rate Shock
230
235
240
245
250
255
260
2014
2015
2016
2017
2018
2019
Gross Nominal Public Debt
(in percent of GDP)
620
640
660
680
700
720
740
760
2014
2015
2016
2017
2018
2019
Gross Nominal Public Debt
(in percent of Revenue)
40
45
50
55
60
65
2014
2015
2016
2017
2018
2019
Public Gross Financing Needs
(in percent of GDP)
230
235
240
245
250
255
260
265
270
2014
2015
2016
2017
2018
2019
Gross Nominal Public Debt
(in percent of GDP)
640
660
680
700
720
740
760
780
2014
2015
2016
2017
2018
2019
Gross Nominal Public Debt
(in percent of Revenue)
40
45
50
55
60
65
2014
2015
2016
2017
2018
2019
Public Gross Financing Needs
(in percent of GDP)
JAPAN
STAFF REPORT FOR THE 2014 ARTICLE IV
CONSULTATION—INFORMATIONAL ANNEX
Prepared By
Asia and Pacific Department (In consultation with other
departments)
FUND RELATIONS ________________________________________________________________________ 2
STATISTICAL ISSUES ______________________________________________________________________ 4
CONTENTS
July 3, 2014
JAPAN
2
INTERNATIONAL MONETARY FUND
FUND RELATIONS
(As of April 30, 2014)
Membership Status: Joined: August 13, 1952; Article VIII
General Resources Account:
SDR Million
Percent Quota
Quota
15,628.50
100.00
Fund holdings of currency (Exchange Rate)
15,032.43
96.19
Reserve Tranche Position
596.27
3.82
Lending to the Fund
New Arrangements to Borrow
8,159.61
SDR Department:
SDR Million
Percent
Allocation
Net cumulative allocation
12,284.97
100.00
Holdings
13,045.56
106.19
Outstanding Purchases and Loans: None
Latest Financial Arrangements: None
Projected Payments to Fund1
(SDR Million; based on existing use of resources and present holdings of SDRs):
Forthcoming
2014
2015
2016
2017
2018
Principal
Charges/Interest
0.08
0.08
0.08
0.08
0.08
Total
0.08
0.08
0.08
0.08
0.08
Exchange Rate Arrangement:
Japan maintains a free floating exchange rate regime. Since the 2013 Article IV consultation, Japan
has not had foreign exchange intervention. The ministry of finance publishes foreign exchange
intervention information on its website. The exchange system is free of restrictions on the making of
payments and transfers for current international transactions, with the exceptions of restrictions
imposed solely for the preservation of national or international security that have been notified to the
Fund pursuant to Executive Board Decision No. 144–(52/51).
1 When a member has overdue financial obligations outstanding for more than three months, the amount of such
arrears will be shown in this section.
JAPAN
INTERNATIONAL MONETARY FUND
3
Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Framework:
Japan underwent an assessment of its AML/CFT framework against the AML/CFT standard by the
Financial Action Task Force (FATF) and the Asia/Pacific Group (APG) in 2008. Significant
deficiencies were identified, notably with respect to customer due diligence (CDD) requirements,
transparency of legal entities, the criminalization of terrorist financing and the freezing of terrorist
assets. Since then, Japan has taken important steps to remedy some of the shortcomings identified.
According to Japan’s May 2013 follow-up report to the FATF (page 3), further action is nevertheless
required, notably with a view to strengthening CDD rules and enabling appropriate freezing of
terrorist assets. In addition, further improvements seem necessary to increase the transparency
(and thus limit the misuse) of legal entities. The FATF urges Japan to promptly meet its commitment
to address these AML/CFT deficiencies, including through the adoption of the necessary legislation.
No dates have been set for Japan’s next mutual evaluation.
Article IV Consultation:
The 2013 Article IV consultation discussions were held during May 21–31, 2013; the Executive
Board discussed the Staff Report (IMF Country Report No. 13/253 and concluded the consultation
on July 12, 2013. The concluding statement, staff report, staff supplement, selected issues paper,
and PIN were all published.
JAPAN
4
INTERNATIONAL MONETARY FUND
STATISTICAL ISSUES
Economic and financial data provided to the Fund are considered adequate for surveillance
purposes. Japan subscribes to the Special Data Dissemination Standard (SDDS) and meets the
SDDS specifications for the coverage, periodicity, and timeliness of data. The Japanese authorities
hosted a data module mission for a Report on the Observance of Standards and Codes (data
ROSC) in September 12–28, 2005. The Report on Observance of Standards and Codes - Data
Module, Response by the Authorities, and Detailed Assessments Using the Data Quality
Assessment Framework (DQAF) were published March 17, 2006 and are available at
http://www.imf.org/external/pubs/ft/scr/2006/cr06115.pdf.
1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
3 Foreign, domestic bank, and domestic nonbank financing.
4 The general government consists of the central government (budgetary funds and extra budgetary funds), local governments, and social security funds.
5 Including currency and maturity composition.
6 Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).
7 Reflects the assessment provided in the data ROSC or the Substantive Update (published on May 17, 2006, and based on the findings of the mission that took place during September 2005)
for the dataset
corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully
observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).
8 Same as footnote 7, except referring to international standards concerning (respectively) source data and its assessment, statistical techniques, assessment and validation of intermediate data and statistical
outputs, and revision studies.
Japan: Table of Common Indicators Required for Surveillance (as of June 10, 2014)
Date of Latest
Observation
Date Received
Frequency of
Data6
Frequency of
Reporting6
Frequency of
Publication6
Memo Items:
Data Quality –
Methodological
soundness7
Data Quality –
Accuracy and
reliability8
Exchange Rates
June 2014
June 2014
D
D
D
International Reserve Assets and Reserve Liabilities of
the Monetary Authorities1
5/31/2014
6/3/2014
Every 10 days
Every 10 days
Every 10 days
Reserve/Base Money
May 2014
June 2014
M
M
M
LO, LO, LO, LO
O, O, O, O, O
Broad Money
May 2014
June 2014
M
M
M
International Investment Position
2013 Q1
June 2013
Q
Q
Q
Central Bank Balance Sheet
5/31/2014
6/3/2014
Every 10 days
Every 10 days
Every 10 days
Consolidated Balance Sheet of the Banking System
April 2014
June 2014
M
M
M
Interest Rates2
June 2014
June 2014
D
D
D
Consumer Price Index
April 2014
May 2014
M
M
M O, LO, O, O
O, O, LO, O, O
Revenue, Expenditure, Balance and Composition of
Financing3 – General Government4
2012
January 2014
A
A
A
O, LNO, O, O
LO, O, O, O, LO
Revenue, Expenditure, Balance and Composition of
Financing3 – Central Government
2012
January 2014
A
A
A
Stocks of Central Government and Central
Government-Guaranteed Debt5
March 2014
May 2014
Q
Q
Q
External Current Account Balance
April 2014
June 2014
M
M
M
O, O, LO, O
LO, O, O, O, O
Exports and Imports of Goods and Services
April 2014
June 2014
M
M
M
GDP/GNP
2013 Q1
May/June 2013
Q
Q
Q O, O, O, O,
LO, LO, O, O, LNO
Gross External Debt
March 2014
June 2014
Q
Q
Q
JAPA
N
INTER
NATION
AL MONETA
RY
FUN
D
5
Statement by the IMF Staff Representative on Japan
July 23, 2014
1.
This statement contains information that has become available since the Staff Report
was circulated to the Executive Board on July 8, 2014. This information does not alter the
staff’s broad assessment of policy issues and recommendations contained in the staff report.
2.
Recent data releases paint a mixed picture but are broadly consistent with staff’s view
that the economic contraction following the consumption tax increase will be short-lived,
with the economy returning to a moderate pace of recovery from the third quarter. In terms of
the details:
•
Private consumption rebounded in May, with the real synthetic consumption index up
by 1.3 percent (m/m), and consumer confidence continued to edge up in June
(41.1 from 39.3 in May).
•
Private machinery orders (excluding volatile items) fell sharply in May (19.5 percent
m/m). In contrast, industrial production rebounded in May (0.7 percent m/m) and
large firms have upgraded their capital spending plan for this fiscal year (7.4 percent
annual, compared to 0.1 percent three month ago), according to the Tankan survey.
•
In line with staff’s baseline, the effects of the latest fiscal stimulus are beginning to be
felt, with contract values of public works orders and public machinery orders rising
sharply in May (14.0 percent and 22.4 percent m/m, respectively).
•
The current account surplus widened in May (about 0.9 percent of GDP), in line with
staff’s expectation of delayed J-curve effects.
•
Headline and core (excluding food and energy) inflation without the effect of the
consumption tax increase declined to 1.6 and 0.5 percent (y/y) in May, in line with
staff’s projection.
3.
The Bank of Japan kept its policy unchanged during its July 15 monetary policy
meeting, noting that Japan's economy is recovering moderately as a trend.
4.
Financial market indicators remain stable. The benchmark 10-year JGB yield has
declined slightly to 54 basis points and equities have risen by about 1.4 percent thus far in
July, while the yen has fluctuated in a narrow range around ¥101 per U.S. dollar.
