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Transcript of a Press Conference on the Conclusion of the Mission for the 2018 Article IV Consultation with Japan

October 4, 2018

Tokyo, Japan

Good afternoon to all of you. It’s really my pleasure to be back in Tokyo on the occasion of the conclusion of the Article IV consultation, and before I make some remarks about the observations that the team has made and our views about the Japanese economy, I would like to start by offering on behalf of the IMF and on my own behalf to all the Japanese people our sincere sympathy and condolences for all the casualties, the deaths, that the country has suffered this year as a result of natural disasters, earthquakes and the like. I know that Japan and the Japanese people always have incredible resilience and spirit in the face of adversity, but you’re really astonishing the world, and it’s certainly an amazing demonstration of collective courage.

I was very lucky over the last two days to have met with Prime Minister Abe, with Vice Premier Aso and with the Governor of the Central Bank of Japan, Mr. Kuroda. I believe that you have received and probably have a copy on your desk of the Concluding Statement, which is the document issued by the team after the work that they do together with the authorities of all sectors, and it really summarizes and gives you a longer version of the key points that I would like to outline for you this afternoon.

This year we took as a central theme of our work the issue of Japan’s demographic transition, and in particular all the issues related to the aging and the shrinking of the working population of the country. We are focusing on the challenges that that situation poses to the economy, to government finance, and of course to the financial system, and how Japan will face those challenges and what response it will give to those issues will certainly set standards for other countries in the world that are beginning to face, or will soon be facing, similar issues with aging populations and shrinking working populations.

What is our forecast for growth in Japan? Well, for this year our forecast is for 1.1 percent and for next year almost one percent—that is 0.9 percent. That is significantly above potential. Underlying growth in the near term will remain firm, notwithstanding the impact of the increase in the tax consumption by two points which is scheduled to take place in October 2019. However, we of course believe that this measure will have an impact on growth in 2020. Finally, we believe that inflation is likely to continue its slow upward trend, but will remain below two percent in the next few years. The financial sector as a whole remains stable; however, because of the combination of the low interest rate, the environment, and the aging population, there is a squeeze on the profitability of financial institutions which is likely to encourage them to search for yields. The resulting risks are likely to persist and pose particular challenges for regional financial institutions.

Now, with that background, I would like to point to four particular elements which are our conclusions after the work that has been done over the last few weeks.

First of all, we are now six years into Abenomics, and a lot has been accomplished thanks to the three arrows of Abenomics. First of all, the risk of deflation has receded. Second, the fiscal deficit has been significantly reduced. Third, unemployment is very low. Fourth, a significant number of women have joined the workforce.

However, inflation remains well below the Bank of Japan’s target of two percent, public debt is not yet on a sustainable path, and household income remains stagnant. In our view, these challenges will only grow as Japan’s population continues to age and shrink. Our assessment is that the population and the size of the economy will actually shrink by 25 percent over the next 40 years. That’s point number one.

So there has to be a fresh look at Abenomics, and we believe that it will require a revamping of policies. The basic principles in our view are still valid but need to be broadened, sustained and accelerated, and, more importantly, the three have to be implemented as a package, because if they are implemented as a package they will mutually reinforce each other.

My third point is that the focus is going to be on rebuilding Japan’s macroeconomic policy space. As it stands, both fiscal and monetary policy are stretched, leaving limited room to respond to shocks. Fiscal policy in the short run should protect growth—should be growth-friendly, if you will. In this context, we believe that the higher consumption tax will help fund growing pension expenses and support fiscal consolidation. However, we also recommend that the 2019 tax increase be accompanied by carefully designed mitigating measures to protect near-term reflation and growth momentum. We believe that the fiscal stance should certainly remain neutral, at least for the next two years. Beyond the short term, we believe that the tax increase should be followed by further small, gradual increases. For the medium and long term, a credible fiscal specific strategy is needed to manage public debt and address age-related costs. On the monetary front, we agree with the Bank of Japan on its continued monetary accommodation with a view to achieving that two percent inflation target that the Bank of Japan has. We welcome the BOJ initiative to make monetary policy sustainable.

My fourth and last point is that reinvigorating Abenomics will depend heavily on reinvigorating the third arrow, that of structural reform. Among all the structural reforms that are available, we believe that labor market reform is a top priority and one that can unleash maximum effect in terms of enhancing workers’ productivity and enabling the pass-through of demand stimulus to wages and prices, thereby feeding into inflation. In addition to the labor market, which we believe is really the top priority, we also have product market reform, corporate governance reform, and trade liberalization, and Japan is already a leader on the last. Most importantly we believe that these reforms not only need to be legislated but they also need to be implemented, they need to be deep, and they need to be credible in order for Japan and the Japanese people to reap the full benefits of this revamp and of accelerated Abenomics. We believe, as I said, that to make progress in view of the significant challenge ahead of Japan, there is a need to revamp, accelerate, and produce that package deal that will be mutually reinforcing in order to respond to the challenges, and from the discussions that I have had with the authorities yesterday and today, I have no doubt that it is the intention of the authorities with the new Cabinet that has just been recently formed to actually develop and implement those policies.

With that, I am very happy to take questions and ?? who is with me on this podium, who is the deputy chief of the Asia-Pacific Department at the IMF, will also be able to take your questions. Thank you.

QUESTIONER: NHK Broadcasting Corporation. The statement notes that that the downside risks have increased in terms of the overall economic outlook. Do you think that now is the time to raise the consumption tax, and how should we deal with the potential negative impact?

MS. LAGARDE: There is never any period without risk, but clearly the Japanese economy is at a juncture where growth has been strong and where growth above potential is forecast, and this is probably best suited for the tax increase needed to generate the revenue to deal with challenges such as health benefit and pension issues, financing education, and reducing the debt burden. We therefore believe that, if properly compensated, the fiscal stance neutrality that we are recommending is appropriate in order for Japan to face its challenges.

QUESTIONER: Nikkei CNBC. The Japanese government has pushed back its goal of achieving primary balance surplus by five years to 2025. What is your view on this?

MS. LAGARDE: We believe that this is much more consistent with the reality of the growth forecast and of the proposed fiscal path in the coming years. It is better to focus and commit to an objective that can be delivered rather than promise a result that is very unlikely. I think that it is evidence of the authorities’ realism to have deferred to 2025.

QUESTIONER: AFP. You said that you feel that Abenomics needs to be revamped and reinvigorated. A key plank of Abenomics is “womenomics.” Prime Minister Abe’s new Cabinet contains one woman out of 25. Do you think politicians should be setting more of an example in this regard, and do you feel that “womenomics” too needs to be reinvigorated and revamped?

MS. LAGARDE: My general principle in terms of Cabinet composition anywhere is the more the better, but I have also been very attentive to Prime Minister Abe’s championing of Japanese women’s contribution to the economy and the introduction of more women into the work force, and we have certainly seen results there. However, given the quality of the female work force here, encouraging long-term quality employment for Japanese women would certainly help to address current issues with low productivity and insufficient manpower. Having more childcare centers so that both parents can mind children and work help with the shortfall of long-term good jobs for women in Japan.

QUESTIONER: Kyodo News. Your statement today calls for a unitary consumption tax rate, but Tokyo has already made the decision to introduce multiple rates come October next year. From your experience as IMF chief and also as French finance minister, should Tokyo rethink this decision?

MS. LAGARDE: Speaking with my IMF hat on, having one single rate is probably the most efficient way to design a structure and collect VAT. Speaking as a former finance minister, however, sometimes having two rates can accommodate the situation particularly of those with low incomes. In that respect, maintaining eight percent VAT on food and beverages and 10 percent on other goods is an approach that I can fully understand, even if it’s not a perfect solution from a purely economic point of view.

QUESTIONER: NNA Asia. Do you expect Japan’s prolonged monetary easing and US credit tightening to have positive or negative impacts on Asian financial markets and economies?

MS. LAGARDE: We fully support the BOJ’s accommodative monetary policy and welcome its determination to make that policy sustainable for the years ahead. We certainly also support clear communication to better inform market participants. Tighter US monetary policy is impacting on markets in Asia and elsewhere, including net outflows now in a number of emerging market economies. It will also mean greater financing costs for parties borrowing in US-denominated instruments, which will clearly an economic and financial impact.

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