January 27, 2022
Brian Walker, IMF [00:00:00] Thank you very much for joining us for the 2020 Japan IMF Article 4 mission conclusion press briefing. We’d like to tell you a little bit about how things have gone and what’s in our report, things that we can share with you today.
[00:00:16] Very happy to have Odd Per Brekk and Ranil Salgado on who were part of this process and will be very happy to answer your questions. Couple of pieces of housekeeping. You probably will have seen the embargo just lifted on the concluding statement, so you may file your stories at will.
[00:00:36] This news conference is also not under embargo. It’s up to you to make your own decisions about filing breaks. We’ll just continue through this. We’re expecting today’s news briefing to last about 30 minutes or so. I encourage you to please identify yourself when you are asking questions. You may also type in the chat or via our IMF press center, and I’d be happy to if you’re having any audio issues, I’d be happy to read those questions out and get those answers.
[00:01:09] Again, we’re going to aim for about 30 minutes, but we’re going to open with a statement by Odd Per Brekk. So, the floor is yours.
Odd Per Brekk, IMF [00:01:21] Thank you, Brian. And good morning in Tokyo and Asia and good evening in our time zone. Thank you all for joining us.
This year’s consultation had two main themes. One, the impact of and the recovery from the COVID 19 pandemic in the short term. And two, the economic policies required to build back a better, stronger, and greener economy beyond the pandemic.
[00:01:51] On the positive side, the Japanese economy is recovering from the pandemic. This is thanks to a strong and timely policy support and high vaccination levels. Real GDP growth is expected to increase to 3.3 percent in 2022, while we expect that the inflation momentum will strengthen further. But, unlike in other advanced economies, inflation in Japan is likely to remain below the 2 percent target over the next few years.
[00:02:25] There are downside risks to this positive baseline outlook in the near-term. These include, of course, uncertainty around the pandemic, domestically as well as globally, which could trigger supply constraints and weakened domestic and external demand. Meanwhile, Japan’s demographic transition, the shrinking of the population and the shrinking of the labor force, will continue to weigh on the economy and on government finances.
[00:02:53] So how will Japan navigate these challenges and potential risks? This was the focus of our discussions over the last few weeks, and four elements stood out, and I will explain and elaborate on those.
[00:03:10] First, in the near-term, policy support needs to be maintained until the recovery from the pandemic is firmly underway. This is in order to protect near-term growth and to sustain the inflation momentum. In this regard, the fiscal stimulus package announced in November last year is a welcome step. It could have been even more effective if it had been better targeted towards lower income families and towards structural transformation of the Japanese economy.
[00:03:44] The Bank of Japan’s commitment to maintaining an accommodative monetary policy stance is appropriate. Achieving the 2 percent inflation target calls for continued monetary accommodation. And the Bank of Japan’s recent shift towards a more targeted pandemic financial support to small and medium sized non-financial corporates is also welcome and appropriate.
[00:04:12] Second point, and now looking further ahead. Once the recovery is firmly in place, the focus of economic policies should shift towards increasing Japan’s macroeconomic policy space. With this in mind, rebuilding fiscal buffers gradually through a credible and detailed medium-term fiscal consolidation strategy that puts debt on a sustainable footing will be essential.
[00:04:40] As regards monetary policy, the Bank of Japan’s accommodative stance needs to continue, to support inflation and growth. To this end, further efforts could be considered to bolster the durability and communication of monetary policy, building on the innovative adjustments to the monetary policy framework that followed the Bank of Japan’s March 2021 assessment. And at the same time, steps could helpfully be taken to mitigate long standing financial vulnerabilities that are structural in nature, particularly in the regional financial institutions.
[00:05:19] And finally, to further underpin the prolonged monetary policy support and prevent the emergence of macro-prudential vulnerabilities. Financial sector supervision should remain vigilant.
[00:05:31] Third point, green and digital investment could be leveraged to promote sustainable and inclusive growth. In this regard, Japan’s pledge to achieve carbon neutrality by 2050 is a positive step. And, also, the government’s digital transformation strategy should help improve Japan’s uneven state of digitalization and, in the process, boost productivity.
[00:05:58] Fourth, structural reforms should aim to boost labor supply, increase productivity, mobilize investment and improve income distribution. Here, labor market reform remains a top priority, particularly to enhance worker productivity and the passthrough of policy stimulus to wages and prices. Policies to help unlock Japan’s potential include more flexible working arrangements; training, including in digital I.T. related skills; and deepening of corporate governance and regulatory reforms.
[00:06:34] Such policies should also help sustain the very welcome increase in female and elderly participation in the labor market that we have seen in Japan over the last several years. So those are the four points.
[00:06:47] And finally, we want to emphasize that this is a comprehensive policy package of fiscal, monetary, digital, green and other growth enhancing reforms, which needs to be implemented in such a way that the individual policy elements reinforce each other. We see this as the best way to make progress towards the government’s objectives of growth and distribution, and I have to say we have been quite impressed by the authorities’ clear commitment in this regard.
[00:07:17] Let me conclude by thanking all our counterparts in the government, in the Bank of Japan and also in the private sector for very open, very productive discussions, we have learned a lot. And also, let me say that at the IMF, we are very appreciative more generally of Japan’s continued lead in fostering multilateral collaboration and in that context, supporting the IMF, including our financial resources and capacity development work. Let me stop here. Thank you.
Brian Walker, IMF [00:07:53] Great, thank you very much. I’d like to direct your eyes over to the chat really quickly, just a couple of housekeeping things, but I’d be happy to open the floor for any questions. Please go ahead and unmute yourself if you would like to join in and ask Odd Per or Ranil any questions. So. Yes, we can hear you like Leika Kihara with Reuters, if you’d like to take the first question would be very happy.
Leika Kihara, Reuters [00:08:48] Thank you. Hi, yes, I’m Mika from Reuters. I have a couple of questions on risks to Japan’s economic outlook. We’re seeing a marked slowdown in China’s growth and obviously that affects Asian economies, including Japan. There is also the worry that that could cool consumption, but also may cause additional supply chain disruptions in Asia. Just wondering if you can elaborate a little bit more on what China’s slowdown and Asia’s growth outlook could mean for Japan’s economic outlook ahead.
[00:09:28] Another point I would like to ask is about the Fed’s rate hike cycle, which seems to be creating some volatility in markets. This is probably more about emerging Asia, but it also does affect Japan in that it could affect their moves ahead. As well as cause some volatility in stocks. What’s your view on the Fed policy shift impact on Japan’s economic and financial outlook?
Brian Walker, IMF [00:09:59] Thank you. Well, perhaps we could go with the first half of the two part question, and we’ll direct that over to Ranil and then we can move on to the Fed impact.
Ranil Salgado, IMF [00:10:13] Thanks, Brian, and Leika for the question. So, in terms of the risk you mentioned, we would agree with you there are some risks related to the Omicron variant. We have built some already into the baseline in terms of our forecast. We are assuming it is a fairly sharp but short-lived variant. It seems to at least in the countries that have already faced the variant – you know, South Africa, the U.K. and even parts of the United States – it does seem to be relatively milder, especially when people are vaccinated, fully vaccinated. And, in addition, if they have boosters. And in the parts, for example, in the United Kingdom and even in parts of the United States, which were original hotspots, we already are seeing a reduction. So that does seem consistent.
[00:11:09] We have built that already somewhat into our baseline, but we see a larger impact from Omicron as a potential downside risk. The second risk you cited is China growth slowdown. That can be a risk, especially through trade, both directly with China, as well as indirectly through other trade partners, especially throughout Asia. And that is a potential downside risk.
[00:11:45] It is important to note, though, that China does have some policy space to respond if growth is very far from, say, five percent. As you know, the IMF has growth a little below five percent for China right now. And again, to the extent that that’s the downside for China, that’s already built into our baseline forecast.
[00:12:06] I think the final area you mentioned was the Fed appears to be beginning a tightening cycle, normalization, of monetary policy. I think you’ve correctly noted that that probably has a bigger impact for Asian emerging markets than for Japan directly. So that is something to watch. But, you know, Asia is, we think, a little more resilient than that in the past. There haven’t been huge capital inflows to Asia in the recent past as compared to, say, prior to the taper tantrum.
[00:12:41] Asia, as fundamentals are reasonably good, reserves are higher in many Asian countries today than several years ago. So, we hope that the impact would be limited, but that’s something to watch.
[00:12:55] I think the final area you discussed is the Yen and yes, tightening monetary conditions could. I guess the Fed tightening cycle could have two impacts. One is you are likely to see wider interest rate differentials between the United States and Japan, which could put some downward pressure on the Yen – depreciation pressure. But if you have financial market volatility, Japan, of course, is considered a safe haven currency. You could have the other impact, Yen appreciation.
[00:13:26] So again, those are risks, something to watch, and we will be doing that. Thank you.
Brian Walker, IMF [00:13:32] And I believe that you’ve got something that you’d like to talk about the wider picture as well.
Odd Per Brekk, IMF [00:13:39] Yes, thank you, Brian. So, I think I’ll just elaborate on what Ranil just said. It is important to keep in mind that Japan’s monetary policy is focused on the inflation target rather than the exchange rate. And so, while there might be some spillovers and you will see that in the exchange rate. Japan’s framework is an inflation targeting framework with a flexible exchange rate, which is a system that has served and is serving Japan very well. And the exchange rate is an outcome rather than a target. I think that’s a very important thing to keep in mind.
[00:14:15] Now with that, we see inflation for the next few years in the one percent range, on current policies, which is below the 2 percent target, which means that the Bank of Japan will need to continue its monetary accommodation, which of course, the Bank of Japan has – and Governor Kuroda has – stated very clearly that they intend to do and which we agree with. Thank you.
Brian Walker, IMF [00:14:43] Leika, I hope that answered your questions, if anybody else would like to join in, please let me know either by the chat or the floor is open. I see somebody is trying to join in, but in the meantime, I did have a question Ranil and Odd Per from the colleagues here in Washington, D.C., from Jiji Press. They had asked for some elaboration on Kishida-nomics and about New Capitalism.
[00:15:35] I know that this came up probably during your discussions. Would you be able to elaborate a little bit about what you learned?
Odd Per Brekk, IMF [00:15:45] Yes, thank you, I can start and Ranil can follow up, but I think the first point I want to make is that we fully support the government’s overall objectives, which is to put growth on a sustainable basis and to address income disparities. And the new government’s economic policy agenda is rightly centered on advancing a cycle of growth and distribution, which does address the economic challenges facing Japan.
[00:16:19] And indeed, there might not be a tradeoff here. Experience suggests that less inclusive growth with higher income disparities is actually also less sustainable growth. And this is one of the reasons more broadly that we have increased our focus in the IMF on income inequality as a macroeconomic issue in recent years.
[00:16:40] And this is an issue, I should say, that has become even more important during the pandemic, because the effects of COVID have hit different sectors and different workers in very different ways. So in in the case of Japan, to accelerate growth-enhancing reforms to help promote strong and inclusive growth, the reform agenda should prioritize measures to increase labor supply and productivity, accompanied by a digital green transformation and corporate reforms that I mentioned earlier.
[00:17:12] As regards concrete policies, we would like to highlight, I think the following as especially welcome. One is the planned strategy to promote the digital transformation and technology innovation and deregulation, especially in creating start-ups. Also the formulation of a green growth strategy and climate commitments, including to reach carbon neutrality in 2050 and a mid-term target of emissions reduction of 46 percent by 2030. And also, the planned strategy to raise wages and reduce gender wage disparities.
[00:17:47] And in this context, the increased public sector wages for health care and childcare workers. So, all these are good initiatives. Now, having that said, we understand that the agenda and the concrete policies are still under development and we look forward to learning more and of course, to engage in the discussion as it develops. Thank you.
Brian Walker, IMF [00:18:16] Turning over to the IMF press center, we have a question from Danny Grant Juliano here in the United States. He says, is it correct that inflation will accelerate slightly but remain below target indefinitely? So, some interesting choices of words there. I’ll leave it to you.
Ranil Salgado, IMF [00:18:40] Right, so I guess I can speak on this. So, what we’ve seen in recent times is inflation, and at least headline inflation has increased in Japan somewhat, but it is primarily in terms of food and energy prices.
[00:18:59] At the same time, we also have some one-off factors that are putting downward pressure on inflation in Japan. Namely, there you see, for example, the reduction in telecommunication mobile phone charges. So, when you strip all of those out inflation, what we call underlying inflation is roughly rising now has increased and roughly rising at 0.5 percent. So, it’s still well below the 2 percent BOJ inflation target.
[00:19:33] We, similar to the BOJ, believe inflation will continue to rise, but around one percent over the medium term. So currently, we still do not see inflation rising all the way towards the target. So that supports what Odd Per said earlier about the need to maintain monetary accommodation for some time in Japan. So, I can stop there.
Brian Walker, IMF [00:20:04] Yes. Odd Per.
Odd Per Brekk, IMF [00:20:08] Yes, just I wanted to just add one point on inflation. So, it is important to keep in mind that inflation expectations are quite entrenched in Japan, but that there have been accomplishments as Ranil said: inflation has actually been on average about one percent since 2012, up to 2019, compared to mild deflation in the decade before. So, let’s keep in mind that there has been progress towards the 2 percent goal, although so far, it’s fallen short.
[00:20:42] Now, to get to the 2 percent, it’s important to keep in mind that monetary policy cannot do it alone, and that monetary accommodation should be part of a broader policy strategy that goes beyond monetary policy, including a well-coordinated mix of more predictable fiscal policy and growth enhancing reforms, and especially reforms in the labor market that will help the monetary policy stimulus to feed through to wages and prices.
[00:21:09] So this is a broader strategy that’s needed. It’s not just about monetary policy, it’s about the whole set of economic policies. Thank you.
Brian Walker, IMF [00:21:20] I see we have a question from a colleague at Reuters. I believe it’s Kajimoto Tetsushi from Reuters who has a question. I open that, and then we’ll go on to a question in the chat from Miya Tanaka.
Tetsushi Kajimoto, Reuters [00:21:40] Hi, thank you for the opportunity. Regarding currency weak Yen, not strong Yen, is becoming a source of concern among some quarters in Japan. What the IMF view on weak Yen? That’s the first question. And the next question is annual spring labor negotiations are coming up and the focus is on wage hikes during, through those talks and so, there is the view that shouldn’t wage negotiations become irrelevant because of dwindling unionization of the labor unions. But anyway, what’s the prospect for wage growth in Japan in the future? Thank you.
Brian Walker, IMF [00:22:44] So perhaps maybe we’ll go to Odd Per on the Yen and then we can discuss who should be coming in on labor.
Odd Per Brekk, IMF [00:22:54] Thank you, Brian. So, I think on the Yen, it is, and I repeat myself, it’s important to, given the debate that you referred to, it’s important to keep in mind that in Japan monetary policy is focused on the inflation target rather than the exchange rate. So, the exchange rate is an outcome of other policies.
[00:23:15] Now, in terms of how you assess the exchange rate, as part of this Article IV consultation, the team has updated its assessment of Japan’s external position. This is something they do routinely, and our assessment is that the current account in 2021, this is our preliminary assessment, was in line with fundamentals. And this also holds for the Yen exchange rate.
[00:23:43] As usual, the details of this analysis will be laid out in the staff report that we will present to the Board and will be discussed in early April. So, you will see more details there. Thank you.
Ranil Salgado, IMF [00:24:00] So, maybe I can try and come in on the wage question. Yes. Over the last few years or even a decade, wages in Japan, especially when adjusted for inflation, have been quite stagnant.
[00:24:17] This partly reflects weak labor productivity growth, which in turn reflects subdued investment and innovation. At the same time, when it’s translated into nominal actual wages, another factor is inflation expectations. So, when workers know inflation is high, they will demand higher wages. But in in Japan, inflation has been quite muted for some time.
[00:24:47] So we think the proper way to get a cycle of wage growth going is partly through, you know, those reforms that end up boosting labor productivity. That’s a key element of it. And at the same time, have inflation expectations rise, and we’ve already discussed a little bit about how to do that. As Odd Per said, it requires a comprehensive package that would be needed to reflect the economy.
[00:25:13] So those include some of the reforms that the government has already initiated. Includes continued monetary accommodation, and it includes supportive fiscal policy when needed. Thanks.
Brian Walker, IMF [00:25:28] And Miya Tanaka, I apologize, but I do have a follow up question from NHK that follows directly on that earlier from NHK, Mr. or Miss Yamada. I’m a reporter from NHK. I have one question why do you think it’s necessary to increase the number of females and the elderly in the labor supply for Japan’s growth? So that seems to follow directly on to that.
Ranil Salgado, IMF [00:25:54] I guess I can give it a start. So, one of the big challenges that Japan faces is demographics. It’s a long-term challenge. It’s a challenge that’s been there for some time. Essentially, what we mean there is overall declining population and the potential risk of a decline in labor force.
[00:26:15] Now over the last few years what has limited the decline in the labor force has been increased participation both by women and the elderly. That’s why we think that is a key for Japan. It’s across the board in terms of growth, in terms of the ability of the government to support the population as needed. All of these are important factors.
[00:26:37] So you do want the labor force to grow as much as possible. And one of the key ways to do that is to increase female, as it has been for many years, to continue increasing female labor force participation, as well as the elderly live longer can have productive lives longer and the government needs to create conditions where they are willing to work for a longer period of time. So, these are the reasons why we think both of those are important.
Brian Walker, IMF [00:27:09] So I hope that answered your question. Now we’ll turn over to Miya Tanaka’s question. Again, this follows on quite well because in many other cultures and countries around the world during this pandemic, you know, we’ve talked about ‘she-cession,” we’ve talked about women and the elderly being forced to take shelter essentially or to take care of their families.
[00:27:34] So I’d like to draw this next question from Mia Tanaka from Kyodo News. I have one question about what was written in the statement that the pandemic will unlikely have, quote significant scarring effects on the Japanese economy. Could you elaborate on what you mean by scarring effects? And the reason why they are unlikely?
Ranil Salgado, IMF [00:27:56] So maybe I’ll take that. So, I guess we have the basic definition of scarring effects is the extent to which growth will return to its pre-pandemic rate of growth. For example, in previous crises like the global financial crisis, you had not just a downshift during the crisis, but the post-crisis growth was lower than the pre-crisis growth. So that’s the basic definition of what we mean by scarring.
[00:28:27] Now the reason we think that scarring will be limited in Japan and for most other advanced or industrial countries is the substantial support that governments and central banks provided. So, in Japan, you saw, for example, significant employment support so that firms would retain workers.
[00:28:50] Similarly, households were provided transfers, which supported the financial position of households. So, as we exit the pandemic, households will have substantial savings that have been built up during the pandemic, which is often different from what you see in other crises. So, we believe households will be in better shape. Firms have been able to retain workers. So those are the reasons why we believe the scarring effects, particularly for the richer countries in the world, will be more limited.
[00:29:27] Right, thank you very much. We’ve reached our target of 30 minutes. Happy to take any other questions that anybody has. I don’t see anything on press center and I don’t see anything in the chat. Please raise your hand if you’d like to ask any follow ups. And if I don’t see anything, maybe Ranil and Odd Per if I could ask you if there’s something that maybe we missed here, or if you’d like to make any other main message points.
Ranil Salgado, IMF [00:30:01] Maybe I can give you just a quick summary again of our main points. Overall, we believe the Japanese economy is recovering. Of course, we’ll see through the Omicron variant and this partly reflects strong support, both by the government as well as the central bank, the Bank of Japan. Going forward as we move to the phase, as Odd Per said of building back better, we would see the need to rebuild some of the buffers in the economy, rebuild policy space.
[00:30:34] Particularly there we are talking about fiscal policy space and then most important is to continue the reforms. Many of the reforms the government has already implemented, but to continue forward with reforms that can prove to provide inclusive and sustainable growth over the long term for Japan. So, I’ll stop there.
Brian Walker, IMF [00:31:02] Well, with that, we’d like to thank everybody for joining us today. We very much appreciate it. Like to draw your attention also to imf.org, where we have a very extensive Japanese language communications channels. We have some really tremendous data that’s all accessible to you. And so, thank you again for joining us. We’ll go ahead and wrap things up. So, we will see you again in one year’s time. And if you have any questions, don’t hesitate to follow up with me Brian Walker at imf.org Media Relations. Thank you very much.