2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Japan


2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Japan

This statement contains information that has become available since the staff report was circulated to the Executive Board. This information does not alter the thrust of the staff appraisal.

1. On November 14, Japan’s Cabinet Office released its preliminary estimate of real GDP growth for the third quarter (July–September) at -1.2 percent (annualized), down from 3.0 percent in the second quarter. The decline in GDP can be attributed largely to several natural disasters affecting Japan, including typhoons in the Osaka area, and an earthquake in Hokkaido. With protracted closures of several important shipment hubs, the typhoon disrupted supply chains, affecting both private investment and exports. Private consumption also contracted, due partly to a disaster-driven surge in fresh food prices. On December 10 the revised preliminary estimate for third quarter growth will be released. Headline CPI inflation continues to increase gradually, recording 1.2 percent (year-on-year) in September, supported by energy and food prices. However, price pressures from domestic demand remain subdued, with core CPI inflation (excluding fresh food and energy) remaining flat at 0.4 percent.

2. Responding to the string of natural disasters, Japan’s Diet passed a supplementary budget on November 7. This supplementary budget amounts to ¥0.9 trillion (about 0.2 percent of GDP), most of which will be allocated for disaster recovery expenditure. Staff expects that the supplementary budget will have an effect next year, supporting 2019 growth.

3. After declining in the second quarter, the external current account (CA) surplus recovered in the third quarter, with a balance (about US$50 billion) equal to the average CA balance over the first half of 2018. The main driver was a larger income balance, due to lower income debits. Meanwhile the trade balance turned to deficit, mostly due to increased goods imports and lower exports—the latter caused by the typhoon-related closure of Kansai International Airport and the Hokkaido earthquake that together disrupted export and tourism receipts. The yen has appreciated (in real effective terms) by almost 2 percent as of September 2018, relative to end-2017. Since the beginning of 2018, equity markets have fallen by 4.2 percent, and the 10-year government bond yield has increased by 7 basis points to 0.11 percent.

4. Japan has expanded its trade agreements. On November 6, Japan’s Cabinet submitted legislation to the Diet that would ratify a free trade agreement with the European Union, aiming to bring the pact into force by February 1, 2019. The agreement would create a bloc covering about 28 percent of global GDP. Further, on October 31, Australia became the sixth country, after Japan, Mexico, Singapore, New Zealand and Canada, to ratify the terms of the eleven- nation Comprehensive and Progressive Agreement for Trans-Pacific Partnership. As a result, the Agreement will come into force on December 30.