Abstract
KEY ISSUESAbenomics is gaining traction, but progress across the three arrows has been uneven andmedium-term risks remain substantial. Inflation has risen, a consumption tax increase has been implemented, and there are signs of a transition to private-led growth. However, structural reforms have progressed slowly and a medium-term fiscal plan beyond 2015 is still to be articulated. Uncertainty is therefore high whether the recovery and exit from deflation will become self sustained under current policies.More forceful growth reforms are needed to overcome structural headwinds to raising growth and ending deflation The next round of structural reforms should lift labor supply, reduce labor market duality, enhance risk capital provision, and accelerate agricultural and services sector deregulation. Corporate governance reforms already underway could help reduce firms’ preference for large cash holdings.A concrete medium-term fiscal reform plan is urgently needed. Given very high levels of public debt, implementation of the second consumption tax increase is critical to establish a track record of fiscal discipline. Adoption of a concrete medium-term fiscal consolidation planbeyond 2015 would build confidence in the sustainability of public finances and allow more flexibility to respond to downside risks. Plans to lower the corporate tax rate have growth benefits, but should proceed in combination with measures to offset revenue losses and be consistent with plans to restore fiscal sustainability.Monetary policy is appropriately accommodative. With inflation and inflation expectations increasing, no further easing is needed at this point. In case downside risks to the inflation outlook materialize, the Bank of Japan (BoJ) should act swiftly through further and/or longer- dated asset purchases. Communication should focus on achieving 2 percent inflation in a stable manner aided by a more transparent presentation of the BoJ’s forecast and underlying assumptions.The financial sector remains stable. Portfolio rebalancing by financial institutions and investors is desirable but also raises new risks, including from greater overseas engagement. In regional banks, limited growth opportunities and low net interest margins could further undermine core profitability and weaken capital buffers. Supervisors should continue to be proactive in monitoring these risks.Japan’s external position is assessed as broadly in balance—compared to moderately undervalued last year—because of structural changes in the external sector, including from the offshoring of production and sustained high energy imports, which have become more apparent.Launching all three arrows will create benefits for the region and the global economy. Spillovers via the trade channel and capital flows are expected to increase in coming years with uncertain net effects—higher exports and capital outflows—in the short term. As long as Japan continues to proceed with its reforms, incomes will rise and fiscal risks decline, which will bepositive for the global economy.
Fund Relations
(As of April 30, 2014)
Membership Status:
Joined: August 13, 1952; Article VIII
General Resources Account:
| SDR Million | Percent Quota | ||
|---|---|---|---|
| Quota | 15,628.50 | 100.00 | |
| Fund holdings of currency (Exchange Rate) | 15,032.43 | 96.19 | |
| Reserve Tranche Position | 596.27 | 3.82 | |
| Lending to the Fund | |||
| New Arrangements to Borrow | 8,159.61 | ||
| SDR Million | Percent Quota | ||
|---|---|---|---|
| Quota | 15,628.50 | 100.00 | |
| Fund holdings of currency (Exchange Rate) | 15,032.43 | 96.19 | |
| Reserve Tranche Position | 596.27 | 3.82 | |
| Lending to the Fund | |||
| New Arrangements to Borrow | 8,159.61 | ||
SDR Department:
| SDR Million | Percent Allocation | |
|---|---|---|
| Net cumulative allocation | 12,284.97 | 100.00 |
| Holdings | 13,045.56 | 106.19 |
| SDR Million | Percent Allocation | |
|---|---|---|
| Net cumulative allocation | 12,284.97 | 100.00 |
| Holdings | 13,045.56 | 106.19 |
Outstanding Purchases and Loans:
None
Latest Financial Arrangements:
None
Projected Payments to Fund1
(SDR Million; based on existing use of resources and present holdings of SDRs):
| Forthcoming | |||||
|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | 2017 | 2018 | |
| Principal | |||||
| Charges/Interest | 0.08 | 0.08 | 0.08 | 0.08 | 0.08 |
| Total | 0.08 | 0.08 | 0.08 | 0.08 | 0.08 |
| Forthcoming | |||||
|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | 2017 | 2018 | |
| Principal | |||||
| Charges/Interest | 0.08 | 0.08 | 0.08 | 0.08 | 0.08 |
| Total | 0.08 | 0.08 | 0.08 | 0.08 | 0.08 |
Exchange Rate Arrangement:
Japan maintains a free floating exchange rate regime. Since the 2013 Article IV consultation, Japan has not had foreign exchange intervention. The ministry of finance publishes foreign exchange intervention information on its website. The exchange system is free of restrictions on the making of payments and transfers for current international transactions, with the exceptions of restrictions imposed solely for the preservation of national or international security that have been notified to the Fund pursuant to Executive Board Decision No. 144–(52/51).
Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Framework:
Japan underwent an assessment of its AML/CFT framework against the AML/CFT standard by the Financial Action Task Force (FATF) and the Asia/Pacific Group (APG) in 2008. Significant deficiencies were identified, notably with respect to customer due diligence (CDD) requirements, transparency of legal entities, the criminalization of terrorist financing and the freezing of terrorist assets. Since then, Japan has taken important steps to remedy some of the shortcomings identified. According to Japan’s May 2013 follow-up report to the FATF (page 3), further action is nevertheless required, notably with a view to strengthening CDD rules and enabling appropriate freezing of terrorist assets. In addition, further improvements seem necessary to increase the transparency (and thus limit the misuse) of legal entities. The FATF urges Japan to promptly meet its commitment to address these AML/CFT deficiencies, including through the adoption of the necessary legislation. No dates have been set for Japan’s next mutual evaluation.
Article IV Consultation:
The 2013 Article IV consultation discussions were held during May 21–31, 2013; the Executive Board discussed the Staff Report (IMF Country Report No. 13/253 and concluded the consultation on July 12, 2013. The concluding statement, staff report, staff supplement, selected issues paper, and PIN were all published.
Statistical Issues
Economic and financial data provided to the Fund are considered adequate for surveillance purposes. Japan subscribes to the Special Data Dissemination Standard (SDDS) and meets the SDDS specifications for the coverage, periodicity, and timeliness of data. The Japanese authorities hosted a data module mission for a Report on the Observance of Standards and Codes (data ROSC) in September 12–28, 2005. The Report on Observance of Standards and Codes - Data Module, Response by the Authorities, and Detailed Assessments Using the Data Quality Assessment Framework (DQAF) were published March 17, 2006 and are available at http://www.imf.org/external/pubs/ft/scr/2006/cr06115.pdf.
Japan: Table of Common Indicators Required for Surveillance (as of June 10, 2014)
Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
Foreign, domestic bank, and domestic nonbank financing.
The general government consists of the central government (budgetary funds and extra budgetary funds), local governments, and social security funds.
Including currency and maturity composition.
Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).
Reflects the assessment provided in the data ROSC or the Substantive Update (published on May 17, 2006, and based on the findings of the mission that took place during September 2005) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).
Same as footnote 7, except referring to international standards concerning (respectively) source data and its assessment, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.
Japan: Table of Common Indicators Required for Surveillance (as of June 10, 2014)
| Date of Latest Observation | Date Received | Frequency of Data 6 | Frequency of Reporting6 | Frequency of Publication6 | Memo Items: | ||
|---|---|---|---|---|---|---|---|
| Data Quality – Methodological soundness7 | Data Quality – Accuracy and reliability8 | ||||||
| Exchange Rates | June 2014 | June 2014 | D | D | D | ||
| International Reserve Assets and Reserve Liabilities of the Monetary Authorities1 | 5/31/2014 | 6/3/2014 | Every 10 days | Every 10 days | Every 10 days | ||
| Reserve/Base Money | May 2014 | June 2014 | M | M | M | LO, LO, LO, LO | O, O, O, O, O |
| Broad Money | May 2014 | June 2014 | M | M | M | ||
| International Investment Position | 2013 Q1 | June 2013 | Q | Q | Q | ||
| Central Bank Balance Sheet | 5/31/2014 | 6/3/2014 | Every 10 days | Every 10 days | Every 10 days | ||
| Consolidated Balance Sheet of the Banking System | April 2014 | June 2014 | M | M | M | ||
| Interest Rates2 | June 2014 | June 2014 | D | D | D | ||
| Consumer Price Index | April 2014 | May 2014 | M | M | M | O, LO, O, O | O, O, LO, O, O |
| Revenue, Expenditure, Balance and Composition of Financing3 – General Government4 | 2012 | January 2014 | A | A | A | O, LNO, O, O | LO, O, O, O, LO |
| Revenue, Expenditure, Balance and Composition of Financing3 – Central Government | 2012 | January 2014 | A | A | A | ||
| Stocks of Central Government and Central Government-Guaranteed Debt5 | March 2014 | May 2014 | Q | Q | Q | ||
| External Current Account Balance | April 2014 | June 2014 | M | M | M | O, O, LO, O | LO, O, O, O, O |
| Exports and Imports of Goods and Services | April 2014 | June 2014 | M | M | M | ||
| GDP/GNP | 2013 Q1 | May/June 2013 | Q | Q | Q | O, O, O, O, | LO, LO, O, O, LNO |
| Gross External Debt | March 2014 | June 2014 | Q | Q | Q | ||
Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
Foreign, domestic bank, and domestic nonbank financing.
The general government consists of the central government (budgetary funds and extra budgetary funds), local governments, and social security funds.
Including currency and maturity composition.
Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).
Reflects the assessment provided in the data ROSC or the Substantive Update (published on May 17, 2006, and based on the findings of the mission that took place during September 2005) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).
Same as footnote 7, except referring to international standards concerning (respectively) source data and its assessment, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.
Japan: Table of Common Indicators Required for Surveillance (as of June 10, 2014)
| Date of Latest Observation | Date Received | Frequency of Data 6 | Frequency of Reporting6 | Frequency of Publication6 | Memo Items: | ||
|---|---|---|---|---|---|---|---|
| Data Quality – Methodological soundness7 | Data Quality – Accuracy and reliability8 | ||||||
| Exchange Rates | June 2014 | June 2014 | D | D | D | ||
| International Reserve Assets and Reserve Liabilities of the Monetary Authorities1 | 5/31/2014 | 6/3/2014 | Every 10 days | Every 10 days | Every 10 days | ||
| Reserve/Base Money | May 2014 | June 2014 | M | M | M | LO, LO, LO, LO | O, O, O, O, O |
| Broad Money | May 2014 | June 2014 | M | M | M | ||
| International Investment Position | 2013 Q1 | June 2013 | Q | Q | Q | ||
| Central Bank Balance Sheet | 5/31/2014 | 6/3/2014 | Every 10 days | Every 10 days | Every 10 days | ||
| Consolidated Balance Sheet of the Banking System | April 2014 | June 2014 | M | M | M | ||
| Interest Rates2 | June 2014 | June 2014 | D | D | D | ||
| Consumer Price Index | April 2014 | May 2014 | M | M | M | O, LO, O, O | O, O, LO, O, O |
| Revenue, Expenditure, Balance and Composition of Financing3 – General Government4 | 2012 | January 2014 | A | A | A | O, LNO, O, O | LO, O, O, O, LO |
| Revenue, Expenditure, Balance and Composition of Financing3 – Central Government | 2012 | January 2014 | A | A | A | ||
| Stocks of Central Government and Central Government-Guaranteed Debt5 | March 2014 | May 2014 | Q | Q | Q | ||
| External Current Account Balance | April 2014 | June 2014 | M | M | M | O, O, LO, O | LO, O, O, O, O |
| Exports and Imports of Goods and Services | April 2014 | June 2014 | M | M | M | ||
| GDP/GNP | 2013 Q1 | May/June 2013 | Q | Q | Q | O, O, O, O, | LO, LO, O, O, LNO |
| Gross External Debt | March 2014 | June 2014 | Q | Q | Q | ||
Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
Foreign, domestic bank, and domestic nonbank financing.
The general government consists of the central government (budgetary funds and extra budgetary funds), local governments, and social security funds.
Including currency and maturity composition.
Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).
Reflects the assessment provided in the data ROSC or the Substantive Update (published on May 17, 2006, and based on the findings of the mission that took place during September 2005) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).
Same as footnote 7, except referring to international standards concerning (respectively) source data and its assessment, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.
When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.