Japan 2018 Article IV Consultation: Demographics Meets Abenomics

Transcription

1 Japan 218 Article IV Consultation: Demographics Meets Abenomics Paul Cashin Assistant Director and Japan mission chief IMF Asia and Pacific Department December, 218

2 Asia remains the world s fastest-growing region Growth projections: Selected Asia (Percent change from a year earlier) World Asia China Japan India Korea Australia and New Zealand ASEAN APD Small States Revision from Apr Revision from Apr Source: October 218 World Economic Outlook; IMF staff. Note: Figures for India are on a fiscal year basis. 2 2

3 Inflation at or below target for most Asian economies Selected Asia: Headline Inflation (Year-on-year percent change) H1 (average) 217 (average) Inflation Target 4 2 India Philippines Vietnam Indonesia Hong Kong SAR Australia China Note: Inflation targets unavailable for Hong Kong SAR, Malaysia, Taiwan Province of China, and Singapore. Sources: CEIC; and IMF staff calculations. Taiwan Province of China Malaysia Korea New Zealand Japan Thailand Singapore 3

4 Japan s economic growth is above potential Real GDP growth above potential for most of the past eleven quarters (Q1 and Q3 218 were negative) Estimated output gap small and negative Very volatile growth trajectory in 218 Domestic demand growth positive External demand remains supportive Financial conditions have tightened slightly, but remain accommodative (In percent QoQ, SA) 2. Private gross fixed investment Government spending Net exports Private consumption 1.5 Private inventories (change) Real growth (QoQ) Contributions to Real GDP Growth 216Q1 216Q3 217Q1 217Q3 218Q1 218Q3 Source: Haver Analytics Cumulative 216Q1 to 218Q3 4

5 while CPI headline and CPI core inflation remain low Headline and core CPI have gained momentum due to higher energy prices Nonetheless CPI inflation remains below Bank of Japan s 2 percent target Progress on structural reforms remains slow The monetary framework has been made more sustainable by Yield Curve Control Inflation Indicators (In percent YoY) Headline w/o VAT Core core (ex. fresh food and energy) w/o VAT Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Sources: Haver Analytics; IMF staff estimates. 5

6 Rising concerns about side effects from prolonged monetary easing Japan: Financial Conditions Index and Credit Cycle (Index and percent) Tighter Financial condition index 1/ Credit cycle 2/ -4 25Q2 27Q3 29Q4 212Q1 214Q2 216Q3 218Q2 Sources: Bank of Japan; Ministry of Finance; Haver Analytics; and IMF staff estimates. 1/ Estimated as the first principal component of (standardized) JGB yield spreads, money market spreads, credit spreads of corporate bonds with different ratings, the first difference of logarithms of stock prices and nominal effective exchange rate, and credit to the corporate and household sectors. See Annex II for the detailed calculations. 2/ Estimated as the first principal component of the HP-filtered credit-to-gdp ratio and yearon-year real credit growth (deflated by CPI). JGB 1-year Yield and Range 1/ (In percent) Sep-16 Nov-16 1-year JGB yield Jan-17 Nov 17, 216 Mar-17 May-17 Jul-17 Range Feb 3, 217 Jul 7, 217 Sep-17 Nov-17 Jan-18 Jul. 27 and 3, 218 Mar-18 Feb. 2, 218 1/ Red circles represent episodes when the unlimited fixed rate facility was accessed by financial institutions. Black circles represent episodes when the facility was made available but not accesed. Source: Haver Analytics. May-18 Jul. 23, 218 Jul-18 Sep-18 Nov-18 Dec-18 6

7 Fiscal consolidation was delayed and progress on structural reforms remained slow Government s New Plan to Advance Economic and Fiscal Revitalization announced in June Achievement of primary surplus postponed to a more realistic FY225 Limited progress in strengthening fiscal framework. Continued reliance on overly optimistic growth assumptions Labor market legislation passed by Diet in June Progress in enhancing labor supply, but social security and tax disincentives remain Primary Balance Projections (In percent of GDP. Central and local government basis) Authorities' baseline 1/ Authorities reform (growth achieved) 2/ PB surplus target -6 FY12 FY14 FY16 FY18 FY2 FY22 FY24 FY25 Sources: Japan Cabinet Office. 1/ Assumes 1.3 percent real and 1.8 nominal GDP growth (FY218-FY227 average). 2/ Assumes 1.8 percent real and 3.1 nominal GDP growth (FY218-FY227 average). 7

8 Downside risks have increased Underlying growth at 1.1 percent in 218 and.9 percent in 219. Will revert to potential over medium term Effects from consumption tax rate increase will likely carry beyond 219 into 22, by adversely affecting domestic demand Japan s macro-financial vulnerabilities, fiscal consolidation needs, and limited monetary policy space make economy vulnerable to adverse shocks 8

9 Demographic headwinds (aging and shrinking population) are strong and getting stronger Official projections show population shrinking by 25 percent over the next 4 years This will depress investment and growth Magnify fiscal challenges of financing social security (healthcare and retirement) Abenomics now six years old has eased financial conditions, reduced fiscal imbalances, raised female and elderly labor force participation But achieving sustained high growth and reflation, and ensuring debt sustainability, will require strengthened policies Japan population loss: equivalent to Stockholm Source: Japan National Institute of Population and Social Security Research; United Nations Statistics Division, Demographic. 9

10 Structural reforms are essential to offset demographic effects Japan: Impact of Demographic Projections (Baseline Simulations; Difference Relative to 217) (% difference) GDP Consumption Investment (pp difference) Current Account/Nominal GDP (pp difference) 8 4 Public Debt/Nominal GDP Aging and depopulation will depress productivity and growth under the baseline scenario Staff analysis finds that real GDP will decline by over 25 percent in 4 years (relative to current policies scenario) due to demographics Government has properly identified areas for reform, but gaps remain and implementation has been slow Sources: GIMF simulations and authors' calculations. 1

11 Impact of credible structural reforms could be large GDP (% difference) LR Japan: Impact of Credible Reforms Labor Market Plus Product Market Plus Trade 4 2 Current Account/Nominal GDP (pp difference) LR Government Debt/Nominal GDP (pp difference) Note: Reported effects are changes relative to the baseline reported in the previous figure. x- axis denotes years, LR= Long-run/steady-state (4 + years). Source: GIMF simulations and authors' calculations LR Real GDP could be given a significant boost by credible implementation of all reforms Real GDP could be as much as 15 percent larger in 4 years relative to the baseline scenario Reforms would also help reflation if contemporaneous demand boost exceeds supply boost Reforms can be ranked by GDP and inflation impacts: Labor market reforms (top tier) Product market and corporate reforms (second tier) Trade liberalization (third tier) 11

12 Monetary policy should remain accommodative, while initiatives can be taken to strengthen the policy framework BoJ JGB Holdings by Maturity, (In trillions JPY) year 5-year 1-year 2-year 3-year 4-year Two-Year Inflation Forecast, / (In percent) BoJ Board Forecast (median) Survey of Professional Forecasters IMF Forecast Inflation target 5 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Source: Haver Analytics. Oct Q1 217Q1 218Q1 Sources: Bank of Japan, JCER, and IMF staff estimates. 1/ Dates refer to the time at which the forecast was made. Inflation forecasts exclude fresh food items and VAT impact. 12

13 Financial sector side-effects, including JGB functioning and potential distortions from ETF purchases, warrant monitoring Annual Change in Outstanding JGBs and BoJ Holdings, (Trillion Yen) YCC introduced QQE2: 8 trillion target introduced Annual change in BoJ's JGB holdings Annualized quarterly change in BoJ's JGB holdings Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Source: Haver Analytics Annual ETF Purchases by Bank of Japan, (In trillion yen) Quarterly Purchases (Annualized) Annual Purchases Target Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Sep-18 Source: Bank of Japan. 13

14 Japan s financial sector remains stable, but low interest rates and adverse demographics are encouraging risk taking Japan: Investments in Long-Term U.S. Securities (In billions of U.S. dollars) 12 Lending to Small Enterprises and Riskiness of Credit Allocation 1/ (In percent change and index) U.S. Treasuries Introduction of negative interest rate policy U.S. non-treasury securities 1/ Jan-12 Dec-12 Nov-13 Oct-14 Sep-15 Aug-16 Jul-17 Jun-18 Sources: U.S. Department of Treasury; and IMF staff calculations. 1/ Including U.S. agency bonds, corporate and other bonds, and corporate stocks Regional banks Others Riskiness of credit allocation (RHS) City banks Lending to small enterprises Source: IMF, April 218 Global Financial Stability Report (GFSR). 1/ The riskiness of credit allocation is an index constructured using firm-level data that measures the extent to which riskier firms receive credit relative to less risky ones (IMF, April 218 GFSR). The index can be calculated based on different measures of firms' riskiness, including leverage, interest coverage ratio, debt overhang, and expected default frequency. The index presented in this chart is a simple average of all these indices after taking two-year moving averages. Shaded areas indicate periods of negative annual real GDP growth for two consecutive years

15 Japan has the world s largest NFA position. Continued monetary easing supports FDI outflows and potentially offsets tighter global financial conditions Goods Services FDI WB-IFC ease of starting a foreign business [28-211] Overall Trade and FDI Regime (=least open country in G2, 1=most open country in G2) Average applied MFN tariff [ ] Non-automatic licensing [21-216] OECD average trade facilitation performance [217] Agricultural support: producer support equivalent (OECD) [ ] Net International Investment Position (In trillions USD) OECD FDI Regulatory Restrictiveness Index [216] WB STRI for services exports under commercial presence [28-211] Japan G2 AE Average G2 Average OECD Services Trade Restrictiveness Index [217] Sources: Tariff data are from the WTO, World Tariff Profiles; the import licensing measure is based on UNCTAD TRAINS and COMTRADE data; the average trade facilitation performance, agricultural support measure, Services Trade Restrictiveness Index (STRI), and FDI Restrictiveness Index are from the OECD; WB STRI is from the World Bank; the post-gfc indicators are from Global Trade Alert Japan China Germany Switzerland France Source: IMF, World Economic Outlook October United States

16 Japan s leadership in advancing multilateralism can help mitigate spillovers from rise in protectionism Japan s trade and foreign direct investment regimes show relative openness, with agriculture the exception Any retreat from cross-border integration would likely reduce Japan s net exports, investment and growth IMF World Economic Outlook simulations indicate that if the U.S. imposes 25 percent tariff on cars and car parts in 219, Japan s long-run output growth rate would decline by.2 percent Japan s Diet approved the Japan-EU trade agreement; and the CPTPP agreement will go into effect at end-december Tariff Elimination Schedule in Agriculture, Fishing, and Livestock Goods under CPTPP Agreement (In percent) Exclusion Rate (Tariff-rate quota, tariff reduction) After 12 years of TPP coming into effect 2 to 11 years after TPP coming into effect Immediately Japan Canada Peru Mexico Chile Vietnam Malaysia New Zealand Source: Cabinet Secretariat. Note: Elimination schedule shown as percent of tariff categories. Brunei Australia Singapore 16

17 218 Japan Article IV consultation: IMF research highlights 17

18 Japan has stubbornly-low inflation expectations Japan: Age Profile of Inflation Expectations (Percent of respondents who think that price will rise in the next 12 months) 1 Japan vs. United States: Distribution of Item-by-Item Rates of Inflation JPN Dec 212 JPN May 218 US May May 218 Feb 217 Mar 216 Mar 215 Mar 214 2's 3's 4's 5's 6's 7's Age (years) Sources: Diamond, Watanabe and Watanabe (218); University of Tokyo Inflation (Percent) Sources: Watanabe and Watanabe (218)

19 Japan s regional banks challenged by adverse demographic trends; demographics also lower the natural rate of interest Japan: Number of Regional Banks with Negative Profits Number of banks % 38% 32% Banking crisis 9% 8% 5% 7% 12% 4% 3% 3% 2% 2% 6% Sources: Japanese Bankers Association; and IMF staff calculations. Note: The percentages above the red (or blue) bars represent the share of regional banks that have negative core (or ordinary) profits. 1/ Includes profits from lending operations and net fee income. Interest expenses from lending operations estimated as interest expenses on deposits multiplied by share of loans in total loans and securities. 2/ Ordinary profits include core profits, net trading income, and net other income. 8% 53% Global financial crisis 18% 15% 12% 1% 22% 3% 36% 38% 52% 51% 3% 3% 2% % % % % 1% Mar-2 Mar-4 Mar-6 Mar-8 Mar-1 Mar-12 Mar-14 Mar-16 Mar-18 Negative core profits 1/ Negative ordinary profits 2/ Japan: Natural Rate of Interest (In percent) th - 8th percentiles Short-term real rate 1/ Natural rate 2/ Mar-9 Mar-93 Mar-96 Mar-99 Mar-2 Mar-5 Mar-8 Mar-11 Mar-14 Mar-17 Sources: Consensus Economics, Inc.; IMF World Economic Outlook; Haver Analytics; United Nations World Population Prospects; and IMF staff estimates. 1/ Ex ante short-term real interest rate (= uncollateralized overnight call rate - inflation expectations). 2/ Bayesian medians estimated from a semi-structural model (using priors from regressions and literature) and sampled using two chains of 25, draws generated with an MCMC algorithm. See the forthcoming WP "Demographics and the Natural Rate in Japan" for details. 19

20 Estimating Japan s potential output Japan: Potential Growth, 2 3 (In percent) 2 Capital Employment Hours TFP Potential Growth Rate Source: IMF staff calculations. IMF estimates Japan s potential growth is currently around.8 percent Potential growth expected to stabilize at about.6 percent over medium term IMF estimates the output gap is small and negative in 218, and will close in 219 IMF estimate of potential output is higher, and estimated output gap more negative, than Cabinet Office and BoJ 2

21 Model-based growth and inflation projections for Japan: GDP growth will stabilize at potential growth rate, while inflation will rise Japan: Real GDP Growth (%YoY) Japan: Headline CPI Inflation (%YoY) 21

22 Previous VAT rate increases adversely affected investment, durables consumption and housing starts; need clear communication on mitigating measures Episode Housing Starts ('; left) 25 Policy announced Housing Starts Episode Policy announced Change (yoy; right) Growth in Gross Fixed Capital Formation (Percent; q/q; annualized, sa) Intellectual Property Products Other Machinery & Equipment etc. Transport Equipment Other Buildings & Structures Residential Investment Gross Fixed Capital Formation 97Q1 97Q2 97Q3 8Q3 8Q4 9Q1 14Q1 14Q2 14Q3 (1997 VAT rate hike) (Global Financial Crisis) (214 VAT rate hike) Sources: Cabinet Office, Japan; IMF staff calculation. 22

23 Demographics will raise age-related costs: VAT rate needs rise gradually to 15 percent by 23. VAT is the least distortive mode of finance Consumption Taxes Under Different Scenarios (In percent) VAT (Baseline) VAT (SSC) VAT (Debt) Source: IMF staff simulations. GDP Under Different Scenarios (Index, 217=1) GDP (Baseline, 217=1) GDP (SSC, 217=1) 8 GDP (Debt, 217=1) Source: IMF staff simulations. 23

24 Automation can help compensate for Japan s shrinking labor force and unlock productivity, yet may adversely affect low-skilled and female workers Manufacturing Robot Density by Prefecture (214) Sources: International Federation of Robotics, Japan Statistical Bureau; IMF staff calculations. 24

25 Why has wage inflation been missing in Japan? Dual labor market effects and low inflation expectations Drivers of Annual Wage Growth in Japan, (In percent, relative to 2-7 average) 6 Inflation Unemployment Wage rigidities 5 Labor market duality Productivity Residual 4 Wage growth Source: IMF Staff calculations. Japan: Annual Wage Growth and Unemployment Gap, / (In percent) Annual Wage growth Unemployment gap 199s 1/ The unemployment gap equals the demeaned unemployment rate. Sources: Haver Analytics and IMF staff calculations

26 Rising global interest rates plus BoJ s yield curve control should help weaken the yen and raise inflation, but reversal of carry trade positions can have the opposite effect Carry Trade Reversal and Yen Appreciation- 26 (In percent) Net yen non-commercial futures position (RHS) Yen/USD cumulative appreciation Yen Appreciation (26) (In cumulative percent change) VIX 2-year interest rate differential Carry trade reversal 1-year interest rate differential Yen/USD Yen Appreciation -7 Mar-6 Mar-6 Apr-6 May-6 Jun-6 Source: Haver Analytics, Bloomberg L.P. Source: Haver and Bloomberg -7-4 Mar-6 Mar-6 Apr-6 Apr-6 May-6 May-6 Jun-6 Source: Haver Analytics, U.S. CFTC, IMF staff estimates. 26

27 Is the current universal-coverage healthcare system fiscally sustainable? Healthcare costs will need to be managed by supply and demand measures and by additional tax revenues Average Length of Hospital Stay (days) - Latest Available Turkey New Zealand USA Sweden Switzerland France UK Norway Finland Poland Italy Korea Canada Germany Russia Japan Source: OECD. Japan: Health Spending under Reform Scenarios, (In percent of GDP) Total health spending (Baseline) Public health spending (Baseline) Total health spending (Scenario A) Public health spending (Scenario A) Public health spending (Scenario B) Source: IMF staff estimates. Total health spending = public health spending + out of pocket spending Scenario A: rationalize total health spending by 1 percent by 23 through cost-saving measures. Scenario B: scenario A plus raise the share of out of pocket spending from 13.1 percent to 2 percent by

28 Gender wage inequality is high in Japan, as is wealth inequality. Older generations much wealthier than the young Gender Wage Gap (In percent of male median wage, data as of 216) Costa Rica Greece Italy Denmark Colombia New Zealand* Hungary Poland Ireland OECD Total Portugal Australia Source: OECD, Gender Wage Gap. *Data as of 217. The gender wage gap is unadjusted and is defined as the difference between median earnings of men and women relative to median earnings of men. Data refer to full-time employees and to self-employed. Switzerland Slovak Republic* Germany Czech Republic* Austria Finland Mexico United Kingdom United States* Canada Japan* Korea* Median Net Wealth Ratio Between Household Ages Above 65 vs. Under Japan Italy US Germany Sources: Japan Statistics Bureau, National Survey of Family Income and Expenditure; US Federal Reserve, Survey of Consumer Finances; European Central Bank, Househould Finance and Consumption Survey; Bank of Italy, Survey on Italian Household Income and Wealth. Note: Above 65 is for Japan, for US and Germany, over 64 for Italy. Under 35 is for Japan, for Germany, under 34 for Italy, and under 35 for US. Data as of 214 for Japan, Germany, Italy. Data as of 216 for US. 28

29 Japan in three charts: OECD-lowest, near-zero inflation; highest dependency ratio; wide gender wage gap Japan: Monthly Wages per Hours Worked (Male vs. Female) (In percent, 215) Source: Social Indicators by Prefecture (217). 29

30 In summary: Policies (1) The consultation centered on the macroeconomic effects of Japan s demographics a rapidlyaging and shrinking population impelling a fresh look at objectives and tools of Abenomics The Japanese economy continues to grow above potential, but inflation remains very low and downside risks have increased Mutually-supportive, reinvigorated, and credible policies are needed to bring Abenomics to full strength, boost productivity and raise potential growth Near-term fiscal tightening should be avoided to support reflation and growth Budgetary and income policies anchored by a well-specified and gradual medium-term fiscal consolidation plan would help support the Bank of Japan s reflation efforts, address demographic challenges, and ensure debt sustainability 3

31 In summary: Policies (2) Macro-structural reforms with ambitious labor, product market, and corporate reforms are imperative to unleash productivity gains, lift long-run growth, stabilize government debt, and counter deflationary effects The Bank of Japan s accommodative monetary policy should be maintained, but more can be done to further strengthen the monetary policy framework and lift inflation expectations Strengthened financial sector policies would lessen the financial risks from demographic headwinds, prolonged low interest rates, and low profitability Japan s 218 external position is projected to be broadly consistent with fundamentals and desirable policies Japan s leadership in advancing multilateralism can help mitigate inward spillovers from a rise in protectionism 31

32 Thank You! IMF Japan papers can be downloaded at: Japan Article IV Staff Report 218 Japan Selected Issued Papers Working Papers: On Financing Retirement, Health, Long-term Care in Japan Macroeconomic Effects of Japan s Demographics Press Release: English 日本語 Japan s Economic Outlook in Five Charts Video: Japan s Economic Health Check Finance & Development Article: Land of the Rising Robots 32