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IMF/ JAPAN ECONOMY
STORY: IMF/ JAPAN ECONOMY
TRT: 2.42
SOURCE: IMF
RESTRICTIONS: NONE
LANGUAGE: ENGLISH /NATS
DATELINE: 10 JULY 2014, WASHINGTON DC / FILE
1. Chart – private consumption before and after tax increase
10 JULY 2014, WASHINGTON DC
2. SOUNDBITE: (English), Stephan Danninger, Division Chief, Asia and Pacific Dept. IMF:
“We think the economy is showing signs of resilience. Private consumption has declined sharply recently as expected, but monthly data show now that it’s recovering. Going forward, we think that over the summer growth will pick up again and the first signs are growing wages, investment, and also public spending has picked up. So, all-in-all, we expect the economy to recover, but at the slow pace beginning this summer.”
RECENT – TOKYO, JAPAN
3. Two shots of interior retail transactions
10 JULY 2014, WASHINGTON DC
4. SOUNDBITE: (English), Stephan Danninger, Division Chief, Asia and Pacific Dept. IMF:
“At over 35 percent, Japan’s corporate income tax rate is one of the highest among developed economies. Its tax code is also complex and there are many other inefficiencies associated with it.We think that the reduction of the tax rate will help growth, but it will not by itself make the tax cut self-financing by generating more revenue, so offsetting measures are necessary. These could come both from reforms of the tax, corporate income tax itself, by broadening its base, but they should also come from other measures, including a higher consumption tax rate which is still low compared to other countries.”
RECENT – TOKYO, JAPAN
5. Various shots, people walking on street plus two shots of Finance Ministry
10 JULY 2014, WASHINGTON DC
6. SOUNDBITE: (English), Stephan Danninger, Division Chief, Asia and Pacific Dept. IMF:
“Well, investment and productivity growth are key for Japan to continue to grow. Here businesses have been too passive after two decades of deflation. Many corporates are profitable and they have large cash holdings, but they’re not investing. Here we think corporate governance reform can make a difference. By adopting a corporate governance code, firms will likely be induced to make more efficient decisions about the use of these resources and savings and thereby increase growth of the economy.”
RECENT – TOKYO, JAPAN
7. Two shots of outdoor stock market tickers
In its latest assessment of the Japanese economy, the International Monetary Fund (IMF) said the recent economic reforms are taking hold, but they need to be more comprehensive and sustained for an extended period. This would help achieve the new inflation target and guard against headwinds from a shrinking labor force and a large fiscal adjustment need.
The IMF report found that “Abenomics”—a three-pronged approach to reflate the economy through monetary, fiscal, and structural policies—is progressing well, but unevenly across the three arrows, with medium-term risks remaining substantial. Aggressive monetary easing by the Bank of Japan has contributed to a pickup in actual and expected inflation. Growth has been well above potential, labor markets continue to tighten, and credit growth has turned positive, including to small- and medium-sized enterprises.
Stephan Danninger, Division Chief of the IMF’s Asia and Pacific Department, said the IMF think “the economy is showing signs of resilience; private consumption has declined sharply recently as expected, but monthly data show now that it’s recovering.”
After strong first-quarter growth driven by rush demand ahead of the consumption tax increase, the economy is expected to contract in the second quarter. Nonetheless, conditions are in place for the economy to weather well the effects of the consumption tax rise and see a return to a moderate pace of recovery in the second half of the year. Private consumption already rebounded in May after a large drop in April.
Talking about the future, Danninger said that over the summer growth will pick up again and “the first signs are growing wages, investment, and also public spending has picked up”
However, the report notes that the recovery has so far relied on fiscal and monetary stimulus, with still tentative investment and export growth. The rise in inflation too has depended to a large extent on the weakening of the yen. These factors raise questions about the sustainability of the recovery over the medium term. Implementing high-impact structural reforms will be essential to maintain confidence and competitiveness and avoid a scenario where monetary policy would be overburdened, which would be detrimental for Japan, as well as other countries in the region.
Since the introduction of the new growth strategy in June 2013, reforms are progressing in several areas and the government recently adopted an updated strategy. These reforms will take time given the range of economic interests involved. The IMF report, however, says more forceful reforms are needed going forward to overcome structural impediments to raising growth and ending deflation.
On corporate tax rate cut, Danniger stated “At over 35 percent, Japan’s corporate income tax rate is one of the highest among developed economies. Its tax code is also complex and there are many other inefficiencies associated with it.”
The IMF recommend in particular, raising the employment of women, older workers, and foreign labor, which would help to offset the aging-related decline in the labor force. At the same time, Danninger thinks deregulating agriculture and domestic services sectors, as well as reforming corporate governance, would help raise productivity and encourage investment.
Danninger said “investment and productivity growth are key for Japan to continue to grow. Here businesses have been too passive after two decades of deflation. Many corporates are profitable and they have large cash holdings, but they’re not investing. Here we think corporate governance reform can make a difference. By adopting a corporate governance code, firms will likely be induced to make more efficient decisions about the use of these resources and savings and thereby increase growth of the economy”.
Although Japan’s fiscal balance is projected to improve over the near term, the debt-to-GDP ratio would continue to rise in the medium term, according to the IMF’s debt sustainability analysis. The report recommends a concrete set of measures that includes further revenue and entitlement reforms to achieve debt sustainability over the medium term, which would allow greater fiscal flexibility to respond to downside risks.
The report says monetary policy is appropriately accommodative and that no further easing is needed at this point with actual and expected inflation steadily progressing toward the 2-percent target. The report, however, suggests the Bank of Japan act quickly if actual or expected inflation stagnates or growth disappoints.
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