This 2009 Article IV Consultation highlights that although Japan was not at the center of the initial crisis, the collapse in external demand and financial spillovers have plunged the economy into a severe recession. Financial policies are focusing on strengthening the resilience of the financial system. Executive Directors have welcomed the support being provided by fiscal stimulus packages. On the monetary front, Directors have commended the authorities for their wide-ranging actions, which have helped to stabilize financial markets and facilitate corporate financing.
1. This statement contains information that has become available since the Staff Report was circulated to the Executive Board on June 17, 2009. This information does not alter the staff’s broad assessment of policy issues and recommendations contained in the staff report.
2. Recent data suggest that economic activity rebounded in the second quarter. Exports and industrial production grew strongly in May (by over 5 percent m-o-m) on the back of progress with inventory adjustment in the IT and auto sectors. Meanwhile, benefits of fiscal stimulus are beginning to be felt, with public works sharply higher and consumer spending edging up. Sizeable fiscal and monetary stimulus should help the economy maintain positive growth in the next few quarters. The June Tankan survey confirms some improvement in business sentiment, but mostly among large manufacturers, while business conditions for SMEs remain difficult. Looking ahead, Japanese corporates see downside risks from overcapacity, tight corporate financing, and external uncertainties. The large economic slack continues to exert downward pressures on prices—core inflation excluding food and energy has fallen to -½ percent (y-o-y). On balance, the recent data are broadly consistent with staff’s growth and inflation projections.
3. The Bank of Japan (BoJ) kept its target rate unchanged at 0.1 percent during its monetary policy meeting on June 15–16, citing downside risks to the outlook. Given the stabilizing economy and some improvement in financial conditions, no new credit easing measures were announced. The benchmark 10-year JGB yield has recently fallen in line with global movements, by about 20 bps since mid-June.
4. The government released its FY2009 Basic Policies on June 23. On the fiscal front, the government committed to a new medium-term target of halving the primary deficit (excluding the social security fund) within 5 years, and achieving primary balance within 10 years. The government also intends to stabilize the debt-to-GDP ratio by the mid-2010s and to put it on a downward path during the early 2020s. However, no numerical targets for the debt ratio were specified. According to fiscal projections by the Council on Economic and Fiscal Policy, achieving these commitments would require raising the consumption tax by 7 percentage points, implying an adjustment of 3½ percent of GDP in the primary balance. While less ambitious than the 5 percent of GDP deficit adjustment under the staff’s preferred scenario (primarily due to lower spending cuts), the thrust of these proposals is in line with staff’s recommendations, and attention now needs to shift to articulating specific measures for achieving the medium-term targets. Other reform agenda focuses on enhancing the social safety net, including through broader eligibility for health care and unemployment benefits. The government also intends to boost its support to green industries as a way of raising potential growth.