Japan: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Japan

JAPAN IMFCountryReportNo.24/118 May2024 2024ARTICLEIVCONSULTATION—PRESSRELEASE;STAFFREPORT;ANDSTATEMENTBYTHEEXECUTIVEDIRECTORFORJAPAN UnderArticleIVoftheIMF’sArticlesofAgreement,theIMFholdsbilateraldiscussionswithmembers,usuallyeveryyear.Inthecontextofthe2024ArticleIVconsultationwithJapan,thefollowingdocumentshavebeenreleasedandareincludedinthispackage: APressReleasesummarizingtheviewsoftheExecutiveBoardasexpressedduringitsMay6,2024considerationofthestaffreportthatconcludedtheArticleIVconsultationwithJapan. TheStaffReportpreparedbyastaffteamoftheIMFfortheExecutiveBoard’sconsiderationonMay6,2024,followingdiscussionsthatendedonApril4,2024,withtheofficialsofJapanoneconomicdevelopmentsandpolicies.Basedoninformationavailableatthetimeofthesediscussions,thestaffreportwascompletedonApril15,2024. AnInformationalAnnexpreparedbytheIMFstaff. AStatementbytheExecutiveDirectorforJapan.Thedocumentslistedbelowwillbeseparatelyreleased. SelectedIssues FinancialSystemStabilityAssessment TheIMF’stransparencypolicyallowsforthedeletionofmarket-sensitiveinformationandprematuredisclosureoftheauthorities’policyintentionsinpublishedstaffreportsandotherdocuments. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.org InternationalMonetaryFundWashington,D.C. ©2024InternationalMonetaryFund PR24/156 IMFExecutiveBoardConcludes2024ArticleIVConsultationwithJapan FORIMMEDIATERELEASE Washington,DC–May13,2024:OnMay6,2024,theExecutiveBoardoftheInternationalMonetaryFund(IMF)concludedtheArticleIVconsultation1withJapan.ThisalsoincludedadiscussionofthefindingsoftheFinancialSectorAssessmentProgram(FSAP)exerciseforJapan.2 TheJapaneseeconomycontinuestogrowafterthepandemic,withbroad-basedpriceincreasesfollowingthreedecadesoflowinflation.In2023Q2,realGDPsurpassedthepeaklevelin2019Q3,andtheoutputgapisestimatedtohaveclosed.However,therecoveryremainsuneven.Whilegoodsandservicesexportshaverisenabovethepre-pandemicpeak,privateconsumptionandinvestmentremainbelow.Headlineinflationhasbeenabovetwopercent(y/y)sinceApril2022.Measuresofunderlyinginflationshowthatthecurrentabove-targetinflationisbroad-basedacrossproductsandservicesforthefirsttimeinthreedecades.Thepassthroughfrominflationtowageshasstartedtopickup.Thecurrentaccountsurplusincreasedto3.4percentofGDPin2023,withtheexternalpositionin2023assessedasbroadlyinlinewiththelevelimpliedbymedium-termfundamentalsanddesirablepolicies. Growthisexpectedtocontinue,withapick-upinconsumptionlaterthisyear.Growthisprojectedtodecelerateto0.9percentin2024,owingtofadingofone-offfactorssupportinggrowthin2023,includingasurgeintourism.Consumptionisexpectedtopick-upinthelatterhalfof2024and2025duetothecombinationofrisingnominalwages,followingthestrongShuntosettlementin2024,andlowerheadlineinflationliftingrealwages.Coreinflationisexpectedtodeclinegraduallyastheeffectofhigherimportpriceswanesbutisprojectedtostayabovethetwo-percenttargetuntilthesecondhalfof2025.Theprimaryfiscaldeficitisexpectedtoremainelevatedat6.4percentin2024,reflectingtheimpactofthelatestfiscalstimuluspackage.Thecurrentaccountsurplusisexpectedtoincreaseslightlyto3.5percentofGDPsupportedbyexports.Anaginganddecliningpopulationwillcontinuetobeamajormacroeconomicchallengeinthemediumtolongterm. Riskstogrowthandinflationarebroadlybalanced.Forgrowth,downsiderisksincludeaslowdownintheglobaleconomy,deepeninggeoeconomicfragmentation,andmorevolatilefoodandenergyprices.Onthedomesticside,themaindownsiderisksareweakconsumptionrelatedtonegativerealwagegrowth,moreacutelaborshortagesthatcouldconstrainactivity,andareturntoazero-inflationenvironment.Ontheupside,additionalrecoveryofinboundtourismandastrongerglobaleconomycouldsupportgrowth.Forinflation,upsiderisksstem 1UnderArticleIVoftheIMF'sArticlesofAgreement,theIMFholdsbilateraldiscussionswithmembers,usuallyeveryyear.Astaffteamvisitsthecountry,collectseconomicandfinancialinformation,anddiscusseswithofficialsthecountry'seconomicdevelopmentsandpolicies.Onreturntoheadquarters,thestaffpreparesareport,whichformsthebasisfordiscussionbytheExecutiveBoard. 2UndertheFSAP,theIMFassessesthestabilityofthefinancialsystem,andnotthatofindividualinstitutions.TheFSAPassistsinidentifyingkeysourcesofsystemicriskandsuggestspoliciestohelpenhanceresiliencetoshocksandcontagion.InmembercountrieswithfinancialsectorsdeemedbytheIMFtobesystemicallyimportant,itisamandatorypartofArticleIVsurveillance,andinthecaseoftheJapanitissupposedtotakeplaceeveryfiveyears.ThelastFSAPexercisetookplacein2017. frombackward-lookinginflationexpectationsandsignificantlystrong-than-expectedwagesfollowingthespringwagenegotiations.Downsideriskscouldcomefromafasterdeclineinglobalgoodsandimportprices. TheJapanesefinancialsystemhaswithstoodaseriesofshocksbutconfrontsseveralchallenges.Keyriskstomacrofinancialstabilityatthecurrentjuncturestemfromthreemainsourcesofvulnerability:thesizablesecurityholdingsoffinancialinstitutions