This 2013 Article IV Consultation highlights that on the back of new policy framework, growth in Japan accelerated sharply in early 2013. First quarter GDP growth rose to 4.1 percent (seasonally adjusted annual rate) after two quarters of stagnation. Rising equity values stimulated consumption, and exports rebounded supported by strong regional demand and a weaker yen. Inflation expectations have started to increase, and actual inflation recorded positive growth in June. The near-term outlook has improved considerably, buoyed by stimulus. In 2014, growth is expected to moderate to 1.2 percent.


This 2013 Article IV Consultation highlights that on the back of new policy framework, growth in Japan accelerated sharply in early 2013. First quarter GDP growth rose to 4.1 percent (seasonally adjusted annual rate) after two quarters of stagnation. Rising equity values stimulated consumption, and exports rebounded supported by strong regional demand and a weaker yen. Inflation expectations have started to increase, and actual inflation recorded positive growth in June. The near-term outlook has improved considerably, buoyed by stimulus. In 2014, growth is expected to moderate to 1.2 percent.

Background and Context

1. In December, the new government announced an ambitious policy framework to end decades-long deflation and raise growth. The “three-arrows” of Abenomics approach (aggressive monetary easing, flexible fiscal policy, and structural reforms) calls for a coordinated policy effort by the Bank of Japan (BoJ) and the government to jumpstart the economy and create sustained growth synergies through bold structural reforms.

2. The announcement of the new policy regime was followed by a quick set of actions.

  • Fiscal stimulus. In February, the Diet approved 1.4 percent of GDP of new debt-financed spending to be executed during 2013–14.

  • A new monetary policy framework. In April, the BoJ introduced the quantitative and qualitative monetary easing (QQME) framework to achieve its 2 percent inflation target with a time horizon of about two years. Under QQME, the BoJ aims to double the monetary base—its new operational target—by 2014 to around 55 percent of GDP. Monetary easing was broadened to include longer-dated government securities, and purchases of risk assets were expanded. The BoJ also committed to continue with easing until 2 percent inflation is achieved in a stable manner.

  • Outlines of fiscal and growth strategies. In June, the government reaffirmed its fiscal consolidation goals of halving the primary deficit by FY2015—from the FY2010 level—and achieving a primary surplus by FY2020, with measures to be developed in the coming months. The announcement also included a broad outline of a comprehensive growth strategy, which targets to raise investment, employment, and productivity, with details to be developed beginning this summer.

3. Upper House elections in July may increase the ruling coalition’s current political momentum to push forward its policy agenda. Following a landslide victory in December, Prime Minister Shinzo Abe’s approval ratings remain high. The Liberal Democratic Party, together with its junior partner, New Komeito, has a two-thirds majority in the Lower House, but currently does not have a majority in the Upper House.

4. Against the background of structural and external headwinds, Japan now needs to follow through with concrete growth and fiscal reforms. The task of raising growth is made more difficult by a rapidly aging labor force and the need to start with fiscal consolidation to maintain confidence in the sustainability of public finances. A still sluggish global recovery and volatile global financial markets are further complicating the task. Hence, this year’s Article IV consultation focused on the key elements of a comprehensive reform package to lift Japan out of a high-debt, low-growth, and mild-deflation environment that has generated substantial financial and fiscal vulnerabilities and poses a risk to economic stability at home and via spillovers abroad.

A Stimulus-Driven but Uncertain Recovery

A. Recent Developments

5. Financial and exchange markets were buoyant in early 2013 and the immediate aftermath of QQME. From September 2012 to mid-May 2013, the Nikkei rose by about 80 percent, with large gains for export-oriented firms and financial institutions. The rise in the stock market occurred in tandem with the strong depreciation of the yen (down 17 percent in real effective terms between end-December 2012 and end-June 2013). Upon adoption of the BoJ’s new policy framework in April, bond yields declined briefly to historic lows with the 10-year rate reaching 45 basis points.

6. Growth accelerated sharply in early 2013 (Figure 1). First quarter GDP growth jumped to 4.1 percent (SAAR) after two quarters of stagnation. Wealth effects from rising equity values stimulated consumption, particularly of luxury goods. A rebound in real export growth (+3.8 percent, q/q) was helped by strong regional demand and a weaker yen. Private investment was flat, as it tends to lag rather than lead exports and because of uncertainty about future growth and corporate tax policies. These generally positive developments were confirmed in May through a further rise in industrial production (2 percent m/m) and retail sales (1.5 percent m/m).

Figure 1.
Figure 1.

Recent Economic Developments and Outlook

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

7. Although there has been some reversal lately, inflation expectations have increased and headline inflation is slowly rising(Figure 2) . Inflation is still lagging at −0.3 percent (y/y) in May, but prices have been rising for three months on a sequential basis. The latter is consistent with the increase in long-term inflation expectations since end 2012, albeit even at their peak they were still well below the BoJ’s inflation target. Indicators of inflation expectations derived from inflation-linked bonds (also known as break-even rates) have trended down since late May, possibly reflecting a reassessment of future growth following the outline of the government’s growth strategy (though the liquidity of those bonds is relatively thin). Overseas factors might also have played a role as a similar decline is observed in the U.S. following the revised market expectation of an earlier exit from quantitative easing.

Figure 2.
Figure 2.

Inflation and Monetary Policy

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

8. In recent months, financial markets have corrected and volatility has increased, driven by domestic and overseas factors. In mid-April, Japanese Government Bond (JGB) market volatility reached levels similar to the 2003 VaR-shock episode, although yields rose by less as banks have since upgraded their risk-management capabilities.

Likewise, the Nikkei declined by 20 percent from the peak and the yen appreciated by 5–10 percent against the U.S. dollar in nominal terms. There appear to be three interrelated factors behind these developments. First, domestic financial institutions are reevaluating the net effect on yields of likely higher inflation and large JGB purchases by the BoJ. Second, questions emerged about the strength of Japan’s new growth strategy. Third, these moves coincided with rising yields and volatility overseas amid a general repricing of risk in global markets. More recently, JGB-yield volatility has declined, although it remains elevated as also indicated by rates on swaptions and options on JGB futures.


Ten-year JGB Yields and Volatility

(In percent; index-RHS)

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

Source: Bloomberg.1/ The JBG yields rose over 100 basis points in short priod during mid-2003. Banks sold off sizeable JGBs under their risk management policy in light of higher volatility exceeding the value-at-risk (VaR) thresholds. The episode was often referred to as the VaR shock in the JGB market. Date of lowest yields nearing VaR shock was June 22, 2003, while that for QQME event was March 27, 2013. Horizontal axis refers to trading days before and after the shock in yields at date “t.”

9. The depreciation of the yen has occurred without a notable pickup in net capital outflows or improvement in the current account (Figure 3). The steady depreciation since November 2012 reflected several factors, including the new monetary policy framework, the reversal of safe haven effects, and a structural weakening of the trade balance from higher energy imports. Since the beginning of 2013, residents have been net sellers of foreign bonds and equities, while nonresidents have been selling Japanese bonds and notes, but buying equities instead. Indeed, large changes in the yen often appear to coincide with changes in derivatives positions that are taken in anticipation of real capital in- or outflows. The current account surplus has continued to decline as a result of high energy imports, although exports have rebounded helped by recovering exports to China since the trough in November 2012 and a weaker yen.

Figure 3.
Figure 3.

External Sector Developments

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

B. Outlook for Growth and External Stability

10. Buoyed by stimulus, the near-term outlook has improved considerably (Table 1). Business conditions have continued to improve as indicated by the second-quarter Tankan Survey results released on July 1. Growth in 2013 is projected at 2 percent, mainly as a result of the new fiscal stimulus and monetary easing feeding through to private consumption and with some lag to investment. A strengthening of external demand—helped by depreciation—and frontloading of consumption and residential investment ahead of the April 2014 consumption tax increase would further support the recovery. In 2014, growth is expected to moderate to 1.2 percent as a continued pickup in private domestic demand is offset by fiscal withdrawal from the consumption tax increase and an unwinding of reconstruction spending (2¼ percent of GDP), as well as weaker global growth.

Table 1.

Selected Economic Indicators

Nominal GDP: US$ 5,959 billion (2012)

Population: 128 million (2012)

GDP per capita: US$ 46,716 (2012)

Quota: SDR 15,629 million (2012)

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Sources: Global Insight, Nomura database; IMF, Competitiveness Indicators System; and IMF staff estimates and projections as of June 20, 2013.

Annual growth rates and contributions are calculated from seasonally adjusted data.

Contribution to GDP growth.

Effect of consumption tax increase in 2014.

Based on normalized unit labor costs; 2005=100.

11. The outlook for inflation depends critically on how inflation expectations adapt to the new framework. Inflation is projected to gradually increase to 0.7 percent by end-2013 as growth improves, inflation expectations rise, and the pass-through of yen depreciation on prices of imported goods becomes more complete. In 2014, headline inflation will temporarily reach 2.9 percent due to the consumption tax increase, but underlying inflation will be closer to 1¼ percent. As staff assumes that Japan’s Philips curve will remain relatively flat—with a slope of about 0.2-0.25—the forecast is based on a substantial increase in inflation expectations.


Contributions to Growth

(In percent)

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

Sources: Haver Analytics and IMF staff estimates.

12. The medium-term outlook is favorable, but unusually uncertain. With QQME, the BoJ has fundamentally changed its monetary policy approach and there is little policy experience to draw on in how to escape from a sustained deflation. Moreover, only broad outlines of structural and fiscal reforms have been announced—as a result, the baseline is based on a partial launch of the three arrows1—leaving uncertainty about long-term growth and fiscal risks on the table. An uncertain energy outlook further complicates the assessment. Bearing this in mind, staff’s baseline estimates project that inflation will reach 2 percent in the medium term while potential growth converges to the pre-global financial crisis level of about 1 percent as a result of a pickup in the pace of capital accumulation.

13. Following the recent depreciation, the yen appears to be moderately undervalued, although as long as a full package of reforms is implemented, this would not be seen as problematic (Table 2 and Appendix I).

  • The current account is moderately stronger vis-à-vis its value implied by fundamentals and desirable policies, but its future path is difficult to ascertain. Taking into account the delayed impact of the large depreciation since last year and the effect of the higher energy imports on the trade balance, the underlying current account appears moderately stronger than implied by fundamentals and desirable policies with a midpoint estimate of ½ percent of GDP. However, this point estimate has a wide range from 1 percent of GDP weaker to 2 percent of GDP stronger as a result of the estimated bands around the underlying current account and the current account norm. For the former, the range is 2.5-4.5 percent of GDP as a result of uncertainty about the permanence of elevated energy imports and different trade elasticities. The range for the latter, the current account norm, is 2.5-3.5 percent of GDP and a result of different estimates how the new macroeconomic framework will affect fundamentals and desirable policies (e.g. higher long-run growth and long-term fiscal adjustment). In sum, the wide ranges around the point estimates reflect the difficulties in quantifying the implications of the ongoing policy regime shift on the current account and its norm: a rise in inflation could weaken the trade balance by appreciating the real exchange rate, fiscal consolidation would strengthen the current account, but its effects would be smaller if growth picks up as a result of structural reforms.

  • The current exchange rate is estimated to be moderately undervalued with a midpoint estimate of 5 percent, but with an unusually wide range of -20 percent undervaluation to +10 percent overvaluation. The large bands are symmetric to the above calculated ESR bands for the current account and also reflect the substantial uncertainty about external sector developments given the major changes in the economic framework and also take account of the high exchange rate volatility. Staff expects the real effective exchange rate to return to a level consistent with fundamentals as long as monetary easing is accompanied by comprehensive fiscal and structural reforms involving all three arrows of Abenomics, which would generate higher inflation and growth.

Table 2.

External Sector Summary

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Sources: Haver Analytics, Japanese authorities, and IMF staff estimates.

C. Risks and Spillovers

14. External risks are to the downside (Appendix II). These include a slowdown in emerging markets, in particular in China, or a protracted period of slower growth in Europe. Spillovers from lower exports could be amplified by weaker domestic demand due to depressed equity prices and more feeble business and consumer confidence. The effects on the outlook from possible exit from easy monetary policy in the U.S. are uncertain. Key spillover channels include potential effects on the yen and nominal interest rates as well as capital outflows from emerging markets with ramifications for Japan’s exports. A weaker or more uncertain global environment matters more at this juncture as it would affect confidence and therefore the change in expectations that is needed for the new policy framework to achieve its objectives.

15. However, domestic risks dominate and have important spillover implications. On the upside, deregulating domestic services and agriculture, strengthening labor markets, and enhancing the availability of risk capital, could raise trend growth to 2 percent over a decade.2 This, together with fiscal consolidation beyond 2015, would support a rise in future income and a reduction in precautionary savings, boosting demand in the near term, and accelerate the attainment of the inflation target (Box 1, complete Abenomics). With regard to spillovers, in this case, higher growth in Japan and easier global financing conditions would over time more than offset the effect of exchange rate appreciation in trading partners (Box 2). A reopening of remaining nuclear plants would provide further upside to growth and the external position. Aside from larger than expected fiscal multipliers that could slow growth in 2014–15, key downside risks include:

  • Absence of credible fiscal consolidation and growth plans (Box 1, incomplete Abenomics). Without concrete measures, the new macroeconomic framework lacks credibility and may fail to raise growth and inflation expectations. Monetary policy might become overburdened and the rest of the world could be negatively affected through a weaker yen. Using the IMF’s Flexible System of Global Models, an illustrative simulation suggests that a sustained 10 percent fall in the yen real effective exchange rate by itself would affect growth in the rest of the world by a very small negative amount (0.03 percent annually at its trough), with a few selected countries (e.g., China, Germany, Korea) losing out by 0.1 or 0.2 percent (see 2013 Spillover Report).

  • Credible fiscal consolidation and growth plans, but Abenomics does not work. Despite all arrows being fired, inertia in inflation expectations, rigid wages, or structural factors (such as the deflationary effects of population aging) could imply that growth and inflation remain stuck, overburdening monetary policy to support activity and prevent yields from rising. With greater uncertainty about fiscal and financial stability, this may trigger capital outflows and exchange rate depreciation, undermining not only Japan’s recovery, but also adversely affecting trading partners especially in the region.

  • Tail risks. Given high debt, a self fulfilling sell-off of JGBs due to the lack of a convincing debt-reduction strategy remains a possibility and markets could shift their perception of BoJ bond purchases toward debt monetization. Yields could spike, undermining domestic and global financial stability, increasing the risk of a reversal in emerging market capital flows, and putting pressure on the BoJ to maintain an accommodative stance for longer, possibly at the cost of its credibility and ability to efficiently manage inflation.

The Potential Effects of Japan’s New Policies on Growth, Inflation, and Debt1

The IMF’s new G20MOD is used to illustrate the potential implications of a complete and incomplete policy scenario relative to a pre-Abenomics baseline. Alongside the latest WEO baseline, we consider the following two scenarios, which both include the adoption of a medium-term fiscal consolidation plan with 1 percent of GDP in adjustment each year after 2015:2

  1. Incomplete Abenomics package: The fiscal stimulus adopted by the Diet in February boosts activity in the short term. Inflation expectations adjust to QQME, but in a sluggish manner. Potential growth remains stuck due to the absence of ambitious structural reforms. The authorities adopt further fiscal stimulus to close the output gap and boost inflation in the near term. Medium-term fiscal adjustment and a rising risk premium (given the need to tap foreign investors as the financing requirement remains high amid declining private savings) cause output and public debt to eventually fall below the pre-Abenomics baseline.3

  2. Complete Abenomics package: The authorities adopt ambitious structural reforms that raise trend growth from 1 to 2 percent over the next decade.4 In combination with QQME and medium-term fiscal consolidation, the complete package aligns inflation expectations quickly with the new target. Structural reform and fiscal consolidation are mutually reinforcing: the government’s financing requirement falls, while private savings recover, preventing the rise in the sovereign risk premium.

Staff’s baseline projections (July 2013 WEO Update, only up to 2018) lie in between these illustrative scenarios. Consistent with policies adopted so far, the baseline incorporates the effects of aggressive monetary easing as well as fiscal adjustment through 2015 (but no further consolidation after that) and only modest gains from structural reforms, specifically higher investment in anticipation of TPP membership. As a result, inflation gradually converges to the target as the output gap closes over the medium term and inflation expectations rise as a result of QQME. However, there are only modest gains in reducing fiscal risks and raising potential growth, leaving important tail risks on the table.


Real GDP

(Level; deviation from pre-Abenomics baseline)

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001



(Actual; excl. effects of consumption tax increase)

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001


Net Debt to GDP

(Deviation from pre-Abenomics baseline)

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

The simulations illustrate the benefits of all three arrows of Abenomics and the risks of an incomplete reform. The 2 percent inflation target, higher growth, and lower fiscal risks will only be achieved in a speedy and sustained manner under a full package of reforms. If inflation expectations are sluggish and the authorities resort to further fiscal stimulus, debt rises over the medium term, increasing fiscal consolidation needs and possibly risking a spike in yields, which would threaten financial stability. Ambitious structural reforms are also essential to offset underlying deflationary pressures from population aging (see IMF 2013 Japan: Selected Issues Chapter 3).

1Prepared by D. Botman (APD), B. Hunt and R. Lalonde (both RES).2The scenarios discussed here expand on those in the IMF 2013 Spillover Report. Specifically, it includes a simulation with sticky inflation expectations. The 2013 Spillover Report also includes a sensitivity analysis with greater exchange rate depreciation.3Accumulation of net debt would be slower than in the pre-Abenomics baseline over the medium-term (third chart), but the actual ratio would continue to increase as deficits remain high.4See IMF (2012), Japan: Selected Issues Chapter 2, for a description of reforms that could yield such an increase in growth.

Spillovers of Japan’s New Macroeconomic Policies1

Spillover channels of a successful effort to revitalize Japan are likely to operate through higher growth in Japan, the exchange rate, and financial inter-linkages. Illustrative simulations using the IMF’s G20MOD suggest that if all three arrows of Abenomics are successfully deployed, spillovers to the global economy are modest, but positive at about 0-0.1 percent of GDP in the short term to about 0.3 percent in the long term. Short-term effects of yen depreciation on competitiveness in other countries is offset over time by the positive effects from higher growth in Japan and lower interest rates in trading partners as a result of greater capital inflows and lower sovereign risk in Japan. In addition, the reforms would also take an important tail risk from a spike in JGB yields off the table, which would have large global repercussions. That said, sharper yen depreciation by about 10 percent, relative to a gradual depreciation in the model’s baseline, implies marginally slower growth (0.03 percent annually at its trough) in the rest of the world with selected countries (e.g., China, Germany, Korea) losing out by 0.1 to 0.2 percent in the near term before recovering in the long term. Also, an analysis in the 2013 Spillover Report, which imputes the effects of QQME on global financial markets from an event study into the IMF’s G35 model, shows small short-lived negative growth effects.

In the near term, spillovers could be more complex and varied than predicted by the model. Potential capital outflows could be larger than model estimates due to a rebalancing of financial institutions’ portfolios from holding domestic debt to foreign assets. Past trends suggest that only a modest share of these additional flows would go to the rest of Asia, with the majority going to other advanced economies with deep and liquid debt markets. The effects of capital inflows on recipient countries would also depend on the state of the cycle. For economies with rapid credit growth and rising asset prices, additional capital flows would raise risks of overheating. On the other hand, easier financing conditions would be beneficial for economies where there is still substantial slack, inflation is less of a concern, or are experiencing outflows from other regions (for example deleveraging by European banks).


Depository Corporations’ Asset (FY2012) 1/

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

Source: Bank of Japan, flow of funds.1/ Includes Japan Post Bank.

Supply-chain considerations also have important spillover implications as they influence the effects of yen depreciation on trading partners, as well as on Japan. The effect of yen depreciation on price competitiveness of neighboring countries is mitigated by the significant amount of imported intermediate inputs that are embodied in their final exports. Moreover, significant portions of Japanese domestic final demand and gross exports are value added imported from other Asian countries, which would therefore benefit from higher growth in Japan.

1Prepared by J.S. Kang (APD). See IMF 2013 Spillover Report and its background papers for a detailed discussion.

The Authorities’ Views

16. The authorities broadly agreed with staff on the near-term outlook. The government’s near-term growth forecast is similar to staff’s. The BoJ Board Member’s median forecast implied a faster rise in inflation expectations and closing of the output gap, but officials agreed that the exact path of inflation is subject to uncertainty. They also noted that a growth strategy and fiscal reforms would support the speedy attainment of the inflation target. As the main risks to the outlook, the authorities noted continued uncertainty about the prospects for Europe and a deeper-than-expected slowdown in China.

17. The authorities emphasized that new policies are targeted towards meeting the domestic objective of ending deflation and supporting growth, and agreed with staff that spillovers from these policies would be positive. They saw the yen’s movement as determined by the market reflecting various fundamentals, while stressing unusually high uncertainty associated with the staff’s exchange rate assessment. The authorities agreed with staff’s assessment that overall spillovers of successful Abenomics would be positive, as stronger growth in Japan should benefit the rest of the world.

A Fresh Start to End Deflation

18. With QQME, the BoJ has embarked on an unprecedented effort to raise inflation above historical levels. After decades of mild deflation, the BoJ has entered unchartered policy territory by targeting 2 percent inflation. With interest rates at the zero bound, the BoJ needs to rely on unconventional policies


Bank of Japan: Monetary Base Target & Balance Sheet Projection

(Trillion yen (LHS), percent of GDP (RHS))

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

Source: Bank of Japan.

19. The transmission channel of QQME has four interconnected components (Figure 2):

  • Reducing long-term real interest rates and risk premia. QQME has the potential to lower the term premium through purchases of longer-dated government securities. Additional purchases of risk assets (commercial paper, corporate bonds, exchange-traded funds, and Japan real estate investment trusts) would contribute to higher business investment, durable goods consumption and residential investment by reducing the funding cost of firms and households, improving firms’ balance sheets, and through the wealth effect.

  • Portfolio rebalancing. BoJ purchases exceed net issuance of government securities over the next two years, particularly in the 5–10 year segment, which would lead to portfolio rebalancing among investors and financial institutions including toward riskier assets and credit extension at home or abroad.

  • Raising inflation expectations, including through stronger communication, would lower long-term real interest rates, thereby stimulating near-term activity.

  • Exchange rate depreciation. Exchange rate depreciation, which is a product of these channels, is a crucial mechanism for QQME to work as it would raise import prices as well as support higher inflation by helping to close the output gap.

20. Transmission is in its early stages, with some positive signs. Nominal yields across maturities are broadly similar to end-2012 levels and volatility has risen, but this partly reflects external factors. Private asset prices have increased substantially. On the other hand, banks have mostly held higher liquidity from fewer JGB purchases as excess reserves at the BoJ and portfolio rebalancing will likely remain gradual depending on further increases in credit demand. Inflation expectations have gradually picked up, albeit still well below the inflation target and there has been a partial reversal recently. Although bonuses have started to increase, basic wages have yet to rise, which would be important to stimulate inflation expectations and support purchasing power once inflation starts to rise.

Policy Issues and Staff’s Views

21. The BoJ’s new monetary policy framework is a sweeping enhancement compared to the previous Asset-Purchase Program. Although the transmission channels are the same, the impact of QQME on inflation is expected to be larger as a result of:

  • A departure from gradualism with greater effects on interest rates and incentives for portfolio rebalancing through a doubling of the monetary base via large-scale asset purchases and a shift to longer-dated JGBs and private assets.

  • Strong communication and forward guidance, which facilitates a rise in inflation expectations, through the setting of a clear time frame for achieving 2 percent inflation, extending the forecast horizon by one year, and by announcing that QQME will continue for as long as it is necessary for maintaining the inflation target in a stable manner.

The joint policy statement between the BoJ and the government is further improving transmission by raising expectations of reform synergies, although the BoJ’s operational independence in meeting its mandate must remain unaffected.

22. The BoJ should recalibrate its easing policies in the event inflation does not pick up as envisaged or JGB market volatility rises again. Depending on the factors preventing inflation from rising, a scaling-up of asset purchases or adjusting its composition could be considered to maintain effective transmission of QQME. Likewise, a return to high volatility in JGB markets would require conducting asset purchases in a flexible manner and strong communication, including that the BoJ is prepared to prevent disorderly movements in nominal JGB yields. In this regard, the actions taken by the BoJ since May, including realigning the maturity and frequency of bond purchases and enhancing communication with market participants, have been appropriate.

23. Complementary growth and fiscal reforms are essential for raising inflation in a durable manner. A robust rise in inflation hinges critically on a rise in inflation expectations, which depends not only on monetary easing, but also on the credibility of medium-term fiscal and growth reforms. Fiscal reforms are needed to provide assurances concerning fiscal and financial stability. Structural reforms that create a more flexible and open economy are critical to support real incomes and to overcome headwinds from inertia in inflation expectations, rigid wages, and the deflationary effects of population aging. If these reforms are successfully implemented, staff estimates that 2 percent inflation could be achieved over the horizon targeted by the BoJ.

24. The BoJ should begin planning early to address exit risks. While exit is still far off, when the time comes near, guiding market expectations about the future of monetary policy puts a premium on strong communication. Likewise, although at the moment unrealized capital losses from asset purchases—estimated at 1–2 percent of GDP3—appear manageable, balance sheet risks will rise substantially as QQME proceeds, which could complicate the exit from unconventional policies. Although buying longer-dated assets is essential for the monetary transmission channel to work, it also raises exit risks and distinguishes a future exit from the experience during 2005-06. In this regard, indemnification against capital losses on bond holdings could be considered, but needs to be weighed against the potential rise in fiscal risks from rising contingent liabilities.

The Authorities’ Views

25. The authorities broadly agreed with the staff’s policy recommendations and viewed recent financial market developments as consistent with their new objectives. They emphasized that bond market volatility had occurred in two phases. First, in the immediate aftermath of the QQME announcement, government bond yields exhibited unusual volatility largely due to the positive surprise on the size and composition of the program, which affected liquidity in certain JGB market segments. The second phase in early May was triggered by external events and was also partly due to financial institutions’ attachment of a greater credibility to the inflation target being reached. Volatility was being addressed through stronger communication and more frequent market interactions, which had been effective also because the bond market is dominated by domestic investors. Officials also noted that policies should be given time to work as the QQME clearly differentiates itself from the gradualism or incremental approach adopted in the past. The authorities explained that it was too early to publicly discuss the exit strategy, but much could be learned from their experience in 2005–06 as well as the possibly nearer term exit by the U.S. Federal Reserve, and it would be important that long-term rates are well anchored at the time of exit.

Ensuring Fiscal Sustainability

26. The fiscal policy stance in 2013 is expansionary due to new stimulus, but substantial consolidation is in the pipeline for the next two years (Figure 4 and Table 3). The fiscal stimulus adopted by the Diet back in February amounts to 1.4 percent of GDP in new debt-financed spending to be implemented during 2013–14, more than offsetting slowing earthquake reconstruction spending this year. As a result, the structural primary balance in 2013 is projected to widen by ½ percentage point to -8.9 percent. In 2014–15, a significant fiscal withdrawal is planned—by 2¼ and 1¼ percent of GDP respectively—as a result of the two-step increase in the consumption tax rate to 10 percent and the waning of stimulus and reconstruction spending. Nonetheless, the public debt ratio is projected to continue to rise with net debt approaching 160 percent of GDP in the medium term as a result of the still sizeable primary deficit.

Figure 4.
Figure 4.

Fiscal Developments

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

Table 3.

General Government Operations

(In percent of GDP)

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Sources: Japan Cabinet Office; IMF staff estimates and projections.

Including fines.

Market value basis.

Nonconsolidated basis.


Nominal Public Investment Quarterly Profile

(In trillion yen (LHS), percent (RHS); annualized)

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

Sources: CAO System of National Accounts and IMF staff estimates (total values up to 2013Q1 are actual values).Note: Figures within chart are q/q growth rates.

Policy Issues and Staff’s Views

27. Fiscal risks have risen in the past year as stimulus has delayed adjustment. Yields on government debt remain near historic lows, hovering around 0.8–0.9 percent for 10-year bonds. Underlying upward pressure on interest rates from deteriorating fiscal conditions is assessed to be substantial, however, albeit masked by BoJ purchases and growing demand for liquid assets due to aging (Box 3). Changes in risk perceptions can occur suddenly and even a modest increase of risk premia by 100 basis points could undermine financial stability in particular in conjunction with other risks.

28. Raising the consumption tax rate is an essential first step to contain fiscal vulnerabilities. The scheduled tax increases in April 2014 and October 2015 should proceed as planned as they are critical to maintain confidence in the ability of the government to address the fiscal problem. Introducing multiple rates should be avoided as it would severely dilute revenue gains, complicate tax administration, and impose a costly administrative burden on small and medium-sized enterprises (SMEs). Instead, targeted transfers could be considered to compensate low-income households, facilitated over the medium term by the implementation of the recently adopted unique identification numbers.

29. To bring public debt firmly on a downward path, an ambitious and concrete consolidation plan beyond 2015 is urgently needed. Achieving the authorities’ fiscal goals published in June would possibly only slow the pace of general government debt accumulation over time. Instead, to contain fiscal risks, staff sees a need to target a declining debt-to-GDP ratio, which requires structural fiscal consolidation of 11 percent of GDP over the next decade. The increases of the consumption tax rate to 10 percent by 2015, together with expiring stimulus and reconstruction spending and measures to contain growth in spending would account for about half of this adjustment. Concrete measures for the remaining structural fiscal adjustment of 5.5 percent of GDP, to take effect after 2015, therefore need to be urgently spelled out. While higher-than-expected nominal growth from a complete macroeconomic reform package could generate some fiscal dividends, these should be saved to serve as a buffer against potential shocks to the fiscal position and higher-than-expected social spending especially on health care (Box 4 and Appendix III).

Low Sovereign Yields Despite High Public Debt: Are Fiscal Concerns Overblown?1

Upward pressures on long-term JGB yields from high public debt have been offset by other factors, but these could change over time. The assessment is based on an econometric panel analysis of long-term sovereign yields in 12 advanced countries covering the period 1990–2012, which extends a previous study by assessing the role of the investor base in affecting yields, and applies the results to Japan.2 Low and stable long-term rates in Japan primarily result from declining growth potential, disinflation, a high share of domestic bond holdings (stable investor base), and population aging (preference for safe assets) since the mid-2000s, which more than offset the impact of deteriorating fiscal conditions (chart, left bar). A 1 percentage point rise in the net public debt-to-GDP ratio would increase long-term yields by 2– 4 basis points, although this effect has declined after the global financial crisis in light of global uncertainty and the related flight to safe assets. A sustained current account surplus also tends to lower long-term rates, but the result is not statistically and economically significant.


A “Counterfactual” Forecast of Long-Term Rates

(In percent)

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

Source: IMF staff estimates.

Purchases by the BoJ over the next few years are likely to suppress a rise in long-term rates, but underlying pressure on yields is likely to rise. Long-term rates would, without fiscal adjustment beyond 2015, be expected to rise by 4 percentage points to near 5½ percent between 2012 and 2030 (blue squares in the chart), of which deterioration in fiscal conditions contributes some 3½ percentage points (about 3 percentage points from the projected rise of the net public debt ratio from 134 percent in 2012 to near 210 percent of GDP by 2030 and ½ percentage point from large fiscal deficits). Rising inflation and shrinking external surpluses would add another 2 and ½ percentage point respectively to nominal yields, although the net increase would be much smaller because of population aging (-1¼ percentage points), BoJ purchases (-¾ percentage points), and other factors (chart).

In a positive reform scenario, the rise in yields could be contained to a sustainable level. Under an upside scenario with a full policy package (Box 1), higher growth and inflation would lead to an increase of nominal yields, but beneficial effects from lower public debt ratios would contain the increase such that long-term nominal rates would be stable at about 4 percent amid a declining debt-to-GDP ratio.

1 Prepared by W. R. Lam (APD). For details, see Selected Issues Paper, Chapter I.2 Ichiue, H., and Y. Shimizu, 2012, “Determinants of Long-Term Yields: A Panel Data Analysis of Major Countries and Decomposition of Yields of Japan and the US,” Bank of Japan Working Paper No.12-E-7.

A Further Fiscal Risk—Health Spending and Financing in Japan1

Japan’s health system is generally regarded as cost effective, but spending pressures are nonetheless evident. The Japanese system has very favorable health outcomes (e.g., longevity), despite the fact that overall spending-to-GDP ratio is around the average of OECD. However, public and private spending on healthcare and long-term care (HC/LTC) more than doubled during the last two decades, reaching 9.4 percent of GDP in 2010. While about half of the past increase originates from population aging, the rest can be attributed to excess-cost-growth (ECG) defined as spending per person in excess of per capita GDP growth after controlling for the effect of demographic change. Extrapolating past trends, HC/LTC spending would increase by as much as 5 percentage points of GDP during 2010–30, with equal parts coming from further population aging and annual ECG of 1 percent.


Financing of Health Care and Long-Term Care 1/

(Percent of GDP)

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

Sources: Authorities and IMF staff calculations.1/ Assumes 1 percent of excess cost growth during 2011-60.

Japan could face serious challenges in financing HC/LTC spending. The government’s contribution on HC/LTC reached nearly 3¾ percent of GDP in 2010, accounting for 39 percent of total health care financing. Given the current financing structure, with 1 percent of annual ECG, the government’s contributions would reach 6½ percent of GDP by 2030 (text chart). On the other hand, various reforms, including raising the effective copayment rates by 5 percentage points, increasing efficiency of using health care resources and strengthening reliance on generics, could save 1.8 percent of GDP, thereby partly offsetting the expected rise in spending.

Given the already high fiscal adjustment needs and rapid aging, deep-seated reforms may be needed to contain rising expenditures. Further increases in copayment rates and cuts in and a review of government-controlled prices of medical services could be considered to address the funding gap. Although projections of long-term spending trends are uncertain, even a moderate rise in health system funding needs poses a downside risk to the fiscal sustainability given the already difficult fiscal situation.

1 Prepared by K. Kashiwase and I. Saito (both APD), and M. Nozaki (FAD). For details, see Selected Issues Paper, Chapter II.

30. Such a medium-term plan should be as growth friendly as possible. Given the magnitude of the needed adjustment, broadly equal efforts on both the revenue and spending side are needed. The fiscal reform should also encompass measures that stimulate incentives to work and invest, and address equity concerns. Key elements could include (see text table on page 18 for details):

  • Gradually increasing the consumption tax to a uniform rate of at least 15 percent, as it is a stable source of revenue in an aging society, one of the least distortionary taxes, and easy to administer. It would also be fairer than other taxes in addressing inequities between young and old generations.

  • Broadening the personal income tax base to raise revenue and improve work incentives, including by reducing exemptions for pension income and eliminating the tax deduction for dependent spouses.

  • Lowering the corporate income tax rate from 35 percent to improve incentives to invest, and reducing the payroll tax to stimulate labor effort. Such a general rate reduction would build upon the recently introduced tax incentives for R&D and investment.

  • Containing rising health care costs, for example by increasing copayment rates, making more efficient use of hospital resources, and relying more on generics.

  • Reducing pension spending, including by raising the eligibility age over time to 67, collecting contributions from dependent spouses,4 and clawing back benefits from wealthy retirees. These savings could fund the reduction in payroll taxes and targeted transfers to low-income households.

  • Strengthening the fiscal framework by adopting medium-term rules to curb expenditure in the context of multi-year budget planning, and limiting the conditions under which supplementary budgets can be used so that hard-won savings cannot easily be spent.

31. With such a plan in place, some fiscal space would be created to smooth the fiscal adjustment in 2014–15, should growth fall substantially below the baseline. Given elevated fiscal risks, monetary policy should be the first line of defense against significant downside risks. In such a case, acceleration or a change in the composition of asset purchases possibly toward more private assets could be considered, as well as a powerful communication strategy to underscore the BoJ’s commitment to achieving its inflation target. Regardless of cyclical conditions, the successive increases in the consumption tax rate should proceed as planned. However, if activity slows substantially, growth-friendly fiscal measures could be considered depending on the degree of commitment to a concrete fiscal consolidation plan that puts debt on a downward path.

Options for Fiscal Adjustment Between end-2011 and 2020

(Excluding reconstruction spending, in percentage points of GDP)

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Excluding the temporary tax increase for reconstruction.

The fiscal savings are assumed to be around 0.1 percentage points of GDP or lower. The savings are assumed to be spent on energy saving initiatives.

Freezing expenditure in nominal terms.

Annual nominal growth at 1-1½ percent.

Lower bound estimate of Kashiwase, Nozaki, and Tokuoka, 2012, IMF Working Paper 12/285.

The Authorities’ Views

32. The authorities noted that fiscal stimulus was necessary to revive the economy despite further adding to public debt and said that they would advance fiscal consolidation while promoting economic growth. They expected that the stimulus passed in February would contribute to sufficiently favorable economic conditions to proceed with the first stage of the consumption tax increase. In general, they pointed out that higher growth was essential to address fiscal problems and within this context emphasized the importance of structural reforms, but would also continue flexible fiscal policy that takes into account economic conditions, especially if growth were to disappoint.

33. The authorities recognized the need for further fiscal consolidation beyond 2015. They stressed their commitment to fiscal consolidation and would formulate a concrete mid-term fiscal plan in the summer. They took note of staff’s proposal on concrete fiscal consolidation measures beyond 2015, including further hike of the consumption tax rate, although they considered it premature to endorse any possible measures at this time.

34. The authorities aimed to create a positive cycle between economic revitalization and fiscal consolidation. They also noted that it is important to prepare a medium-term fiscal plan setting out as detailed fiscal consolidation measures as possible. The authorities also indicated that their debt management strategy would continue to aim for lengthening the maturity of government debt, while remaining cognizant of interest rate risk in the financial system.

Reviving Growth through Structural Reforms

35. Ambitious structural reforms are essential for the overall success of the new policies. A more flexible economy is needed to raise productivity and wages and to reduce fiscal risks. Expectations of higher incomes down the road would support economic activity and the exit from deflation already in the near term. As noted during last year’s consultation (Appendix IV), important synergies exist between aggressive monetary easing, medium-term fiscal consolidation, and structural reforms and each arrow being successfully launched is a necessary condition for the others to succeed (Figure 5 and Table 4).

Figure 5.
Figure 5.

Structural Issues

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

Table 4.

Medium-Term Projections

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Sources: Global Insight, Nomura database; and IMF staff estimates.

36. The government’s new growth strategy includes several ambitious goals, but specific measures or a more concrete timetable in some areas remain to be formulated. The strategy targets average annual real growth of 2 percent over the next 10 years, as well as doubling inward FDIs and agricultural exports by 2020. It reiterates the government’s intent to partake in the Trans-Pacific Partnership (TPP) and to raise the employment of women, promote labor mobility across industries including by expanding the role of the private sector in providing job-matching services, and to institute special economic zones to experiment with deregulation. It also pledges to bring annual private investment back to its pre-Lehman shock level (70 trillion yen, or 14 percent of GDP) including through tax incentives. The government is also formulating a plan for reinforcing corporate governance and has indicated that it will liberalize the energy market by separating generation and transmission activities.

Policy Issues and Staff’s Views

37. The next round of announcements should include more concrete and decisive steps to create broader growth synergies. The government’s participation in the TPP negotiations and its intention to eliminate waiting lists on kindergartens and day-cares, which would support the employment of women, are important steps. Going forward, the strategy should avoid a sector-specific (“picking winners”) approach and over-reliance on tax incentives/subsidies that characterized past plans that ultimately proved to be unsuccessful. Some measures could be adopted quickly, for example in the area of raising the employment of women, which would give and important signal about the government’s commitment to reforms. In general, key measures should include:

  • 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. Other measures include improving the timeliness of data in the SME credit registry, encouraging more asset-based lending, and reducing the reliance on personal guarantees.5

  • Implementing steps to reduce labor market duality and increase productivity, including clarifying the legal framework for limited regular (“gentei seishain”) contracts. To ensure that greater flexibility is rewarded through new employment opportunities, complementary measures to strengthen job matching and assist workers during periods of temporary unemployment should be considered (Box 5).

  • 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.


Labor Market Duality and Productivity by Sector

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

Sources: Mizuho Research, Ministry of Internal Affairs and Comminications, and IMF staff estimates.1/ Productivity measured as value-added per worker.

Increases in potential growth from these reforms could be sizeable,6 although precise estimates are difficult to pin down.

The Path to Higher Growth: Does Revamping Japan’s Dual Labor Market Matter?1

The share of non-regular workers, which was below 20 percent before the bursting of the bubble in the early 1990s, has now reached 35 percent (text chart). Compared to regular workers, non-regular workers have much lower level of job security, are paid lower wages and receive significantly less social insurance coverage. About 70 percent of non-regular workers are women. Low value-added service sectors are highly reliant on non-regular work. Japan’s share of temporary workers—a proxy of labor market duality available for international comparisons—is above the OECD average.


Annual Change

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

Sources: Ministry of Internal Affairs and Communications and IMF staff calculations (Feb. 1985-2001, 2002-2012 Jan.-Mar. average).

The macroeconomic costs of excessive labor market duality are likely to be substantial. Japan’s large labor market duality has likely resulted in reduced productivity and growth, by lowering firms’ incentives to train non-regular workers, and through reduced workers’ effort due to low job satisfaction.2 Staff estimates that the ceteris paribus effect of reforms that would reduce the difference in employment protection between regular and temporary workers could bring the share of non-regular workers in Japan below 30 percent. Reducing labor duality could have substantial macroeconomic benefits—for example, Dolado, Ortigueira, and Stucchi (2011)3 find that 20 percent of the productivity slowdown in Spanish manufacturing between 1992 and 2005 is due to reliance on temporary work.

Reducing the difference in employment protection between regular and non-regular workers would significantly reduce labor market duality in Japan. Steps to reduce labor market duality and increase flexibility could include clarifying the legal framework for limited regular (“gentei seishain”) contracts, which would increase their usage. To ensure that greater flexibility is also rewarded through new employment opportunities, complementary measures to strengthen job matching and support systems should be considered.

1 Prepared by C. Aoyagi and G. Ganelli (both OAP). For technical details, see the Selected Issues Paper.2 Fukao and others, 2007, “Deferred Compensation: Evidence from Employer-Employee Matched Data from Japan,” HiStat Discussion Paper No. 187; and Kawaguchi and others, 2006, “Are Wage-Tenure Profiles Steeper than Productivity-Tenure Profiles? Evidence from Japanese Establishment Data from the Census of Manufacturers and the Basic Survey Wage Structure,” Hi-Stat Discussion Paper No. 189.3Dolado, J., S. Ortigueira, and R. Stucchi, 2011, “Does Dual Employment Protection Affect TFP? Evidence from Spanish Manufacturing Firms,” Economics Working Papers 1137.

The Authorities’ Views

38. The authorities agreed with the need to implement growth-enhancing structural reforms (the third arrow of Abenomics). They were committed to create new trade rules through TPP participation and lay the foundation for larger trade agreements. They further stressed that the growth strategy, which was presented on June 14, is a first step and that a window of opportunity was opening for Japan to implement growth-enhancing reforms. They were confident that the new reforms would succeed in raising female labor participation, promoting private investment, increasing productivity in agriculture, and reallocating workers to fast growing sectors.

Enhancing Financial Sector Stability

39. Major banks have benefited from buoyant capital markets and an improved outlook (Figure 6 and Table 5). The 2012 Financial Sector Assessment Program (FSAP) Update found that the financial system was generally sound (Figure 7 and Table 6). Since last year, capital positions of major financial institutions have improved due to strong equity performance, rising income from securities trading, and capital gains on JGBs and foreign asset holdings, while credit costs in banks remain limited. Profits for internationally active banks have also risen due to relatively high net interest margins on overseas loans, which rose by 20 percent (y/y). Further expansion abroad would be another channel through, which the new policy framework could generate positive spillovers to the region (Box 6).

Figure 6.
Figure 6.

Financial Market Developments

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

Table 5.

External and Financial Indicators

(In percent of GDP, unless otherwise indicated)

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Sources: Global Insight, Nomura Database; IMF, International Financial Statistics; Fitch IBCA; and IMF staff estimates.

Public sector debt securities and other loan liabilities.

Other investment income, debit.

Twelve-month percent change for the latest figure.

Major banks. Capital ratio is on a nonconsolidated basis.

Figure 7.
Figure 7.

Financial Soundness Indicators

Citation: IMF Staff Country Reports 2013, 253; 10.5089/9781484389416.002.A001

Table 6.

Financial Soundness Indicators for Japanese Deposit-Taking Institutions 1/*

(In percent)

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End of of fiscal year (i.e. end-March of following year). FY2012 refers to half-year ending September 2012. Figures include city banks and regional banks, but not shinkin banks (consolidated basis).

The figures in I.1~I.4 are aggregated with the unconsolidated basis data.

The figures in I.1 and I.2 are rounded down less than a unit. The other figures are rounded up less than a unit.

I13 Capital to Assets = Net Assets / Total Assets

I18 Trading income to total income = (Market Return Gains on sales of bonds + Gains on redemption of bonds + Gain on sales of stocks and other securities) / Ordinary profit.

I19 Personnel expenses to noninterest expenses = Labor cost/Operating Cost

I25 Net open position in equities to capital = Equity / Net asset

40. Nonetheless, overall low profitability and high interest rate risks remain a concern. Financial institutions, particularly regional and shinkin banks, face elevated risks from narrow net-domestic-interest margins (around 1 percent), large holdings of JGBs and equities, and potentially rising credit risks from household mortgages as well as SMEs in light of the welcome expiration of the SME Financing Facilitation Act in March. At the current juncture, uncertainty about interest rate movements may put further pressure on bank profitability, especially for those that rely on interest income from long-duration JGBs, and on the asset allocation of major life insurers.

Policy Issues and Staff’s Views

41. A complete package of reforms could further strengthen financial system soundness. Declining JGB holdings by banks as a result of QQME could reduce exposures to interest rate risks. Rising stock prices are giving banks and insurers an opportunity to divest their equity holdings to reduce exposure to market risk. By solidifying financial stability, these factors would enhance the role of the financial sector in promoting growth by extending more risk-based capital, provided that banks strengthen their credit-assessment capabilities.

Will Japanese Financial Institutions Continue to Expand Abroad Under the New Policies?1

Cross-border activity of Japanese financial institutions has risen over the past few years, particularly to the Asian region. Since the global crisis in 2008 overseas claims by Japanese banks have grown annually on average by about 8 percent and by 19 percent in the Asia Pacific region. Major Japanese banks have attained an important global and regional presence, particularly in areas of syndicated lending and project finance. This trend could be affected under the government’s new policy framework. There are concerns that an improved domestic outlook and a weaker yen could lead to a more inward focus to satisfy rising credit demand.

Based on a cross-country panel analysis, global and regional factors play a more important role than domestic push factors in banks’ overseas activities. Low global uncertainty (measured by the VIX index) and a high growth differential between destination and domestic growth prospects are important drivers for banks’ rising foreign claims. For instance, a 1 percentage point increase in the real growth differential could increase the foreign claims by about 0.3-1.6 percentage point. Applying the estimates to Japanese banks suggests that about 40 percent of the rise in claims to Asia is due to a decline of global uncertainty, while regional factors contribute another 20–25 percent. Among home factors, domestic push factors through a substitution between domestic and foreign credit contributed only a small share to the overseas expansion of about 5 percentage points. The remainder is accounted for by strong financial fundamentals of domestic banks. Stronger domestic growth in Japan as a result of the BoJ’s asset purchases could mitigate the pace of growth in overseas lending, but is unlikely to reverse a long-standing trend because empirical estimates suggest that global and regional factors play a more prominent role.

Foreign Consolidated Claims of Japanese Banks 1/

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Source: BIS.

As of September 2012.

Pheripheral European countries include Italy, Ireland, Greece, Portugal, and Spain.

Core European countries include France, Germany, Switzerland, and United Kingdom.