IMF Executive Board Consultation with Japan

On May 6, 2024, the Executive Board of the International Monetary Fund (IMF) concluded its Article IV consultation with Japan, incorporating findings from the Financial Sector Assessment Program (FSAP). Japan's economy has continued its post-pandemic growth, with real GDP exceeding pre-pandemic levels by the second quarter of 2023. However, this recovery remains uneven, as private consumption and investment have not kept pace with the rise in goods and services exports. Inflation, which has been above two percent since April 2022, marks a departure from three decades of low inflation and is now widespread across various products and services, resulting in rising wages. In 2023, the current account surplus grew to 3.4 percent of GDP, aligning with medium-term fundamentals and desirable policies.

Looking forward, Japan’s economic growth is expected to continue but at a slower rate of 0.9 percent in 2024, as temporary growth drivers, such as a surge in tourism, fade. An increase in consumption is anticipated later in 2024 and into 2025, driven by rising nominal wages from a robust Shunto settlement and lower headline inflation boosting real wages. Core inflation is projected to decline gradually but remain above the two-percent target until the second half of 2025. The primary fiscal deficit is expected to stay high at 6.4 percent in 2024 due to recent fiscal stimulus measures, while the current account surplus is projected to slightly increase to 3.5 percent of GDP. Japan continues to face significant medium- to long-term challenges, particularly due to its aging and shrinking population.

Japan’s financial system has demonstrated resilience amidst recent shocks but continues to confront several challenges. Key vulnerabilities include the substantial security holdings of financial institutions, significant foreign currency exposures of some banks, and signs of overheating in parts of the real estate market. Systemic risk analysis from the FSAP indicates that while the financial system is generally resilient to adverse macrofinancial shocks, certain areas require close monitoring. Additionally, the risks associated with climate change and increasing digitalization, including cyber risks, need careful oversight. Although financial sector policies have been strengthened in recent years, further measures are necessary to maintain financial stability in a dynamic risk environment.