The International Monetary Fund (IMF) has concluded its Article IV mission to Japan, revealing insights into the country's economic trajectory and challenges. The IMF's staff has observed signs of potential sustainable inflation convergence in Japan after three decades of near-zero inflation. Inflation has exceeded the Bank of Japan’s 2-percent target for over two years, with strong wage growth accompanying a tight labor market.
Despite these positive developments, Japan continues to grapple with an aging population and high public debt. The IMF emphasizes that policy priorities should focus on re-anchoring inflation expectations, rebuilding fiscal buffers, and advancing labor market reforms to support growth.
Recent economic performance showed contraction in early 2024 due to supply disruptions but gained momentum later in the year. Private consumption strengthened while external demand lagged. Headline and core inflation remain above the BoJ’s target, driven by energy and food prices, although services price growth is weaker.
Looking ahead, growth is projected to accelerate in 2025 as wage growth boosts household income. Private investment is expected to stay robust due to high corporate profits and favorable financial conditions. However, risks remain skewed towards the downside with global economic slowdowns and domestic consumption weaknesses posing threats.
The fiscal deficit was smaller than anticipated in 2024 but may increase slightly in 2025 due to planned additional spending. Public debt relative to GDP is projected to decline short-term but rise by 2030 without a clear consolidation plan addressing expenditure pressures from health care needs of an aging populace.
Monetary policy remains accommodative with expectations for gradual withdrawal if forecasts hold true. The Bank of Japan maintains a flexible approach amid uncertainties and communicates clearly regarding balance sheet reductions.
Japan's financial system shows resilience backed by capital buffers despite systemic risk concerns linked to macroeconomic uncertainties and interest rate increases impacting SMEs’ bankruptcies.
Structural policies highlight slowing productivity growth hindered by allocative inefficiency since the early 2000s alongside demographic challenges affecting labor markets. Industrial policies aim at security resilience through green transformation efforts requiring comprehensive cost-benefit analysis given limited fiscal space.
The IMF team thanked Japanese authorities for their cooperation during discussions which included meetings across various sectors including finance ministry officials along with business community representatives among others.