Key Economic Challenges in Japan and Asia Changyong Rhee IMF Asia and Pacific Department February 2017 1
Global and Asia Outlook 2
Global activity strengthening, with rising dispersion and uncertainty 3 Global growth: uneven pick up: Advanced Economies (AE): improving performance primarily from the US with growth in other countries sustained at sluggish rates. Emerging Market and Developing Economies (EMDE): near-term growth prospects revised up, primarily from China, but substantial weakening in a few large economies. Dispersion of outcomes is large, given uncertainty surrounding the policy stance of the incoming U.S administration and its global ramifications. Policy priorities: differ across individual economies, but action relying on all levers is needed to reduce uncertainty and head off further growth disappointments. 3
Growth projections: Advanced economies (percent change from a year earlier) World Advanced Economies U.S. U.K. Japan Euro Area Germany Canada Other Advanced Asia 2016 3.1 1.6 1.6 2.0 0.9 1.7 1.7 1.3 2.0 2017 3.4 1.9 2.3 1.5 0.8 1.6 1.5 1.9 2.3 Revision from Oct. 2016 0.0 0.1 0.1 0.4 0.2 0.1 0.1 0.0-0.2 2018 3.6 2.0 2.5 1.4 0.5 1.6 1.5 2.0 2.6 Revision from Oct. 2016 0.0 0.2 0.4-0.3 0.0 0.0 0.1 0.1-0.1 Sources: IMF, World Economic Outlook January 2017 Update; and IMF, World Economic Outlook October 2016. 4
Growth projections: Emerging markets and LIDCs (percent change from a year earlier) World Emerging Market and Developing Economies China India Brazil Russia Commodity Exporting Economies Low Income Developing Countries 2016 3.1 4.1 6.7 6.6-3.5-0.6 1.0 3.7 2017 3.4 4.5 6.5 7.2 0.2 1.1 2.4 4.7 Revision from Oct. 2016 0.0-0.1 0.3-0.4-0.3 0.0-0.1-0.2 2018 3.6 4.8 6.0 7.7 1.5 1.2 2.9 5.4 Revision from Oct. 2016 0.0 0.0 0.0 0.0 0.0 0.0-0.1 0.2 Sources: IMF, World Economic Outlook January 2017 Update; and IMF, World Economic Outlook October 2016. 5
Underlying baseline assumptions 6 Changing policy mix in the US including near-term fiscal stimulus and a less gradual normalization of monetary policy Firming of oil and some other commodity prices. Gradual return to growth in stressed economies. Policy stimulus in China and gradual unwinding of credit boom and rebalancing. 6
Asia remains the world s most dynamic region, continuing to deliver two-thirds of global growth 7 Contribution to Global Growth, 2008-16 (In percentage points) 6.0 China Japan Rest of Asia United States Others World 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: IMF, World Economic Outlook; and IMF staff calculations. 7
New Considerations since Oct 2016 8 Will the US new administration make good on the reflation expectations? What about protectionist policies? Will there be a hand-over from monetary to fiscal policy globally? Will Brexit be hard or soft? More surprises in the European electoral cycle? Will the legacy issues of European banks finally get resolved? Will a stronger dollar and higher yields destabilize EMs? Will Chinese growth and the financial sector continue to be stable? Will the promised OPEC output cuts occur? 8
New possible directions for policies in the US 9 Tax policy (corporate income tax cut and border adjustment tax) Support for infrastructure investment Trade policies Deregulation of the financial sector Immigration policy Environmental regulations Health care reform 9
Japan Outlook 10
Japan: slow and bumpy 11 Contributions to QoQ Real Growth (SA) (In percent) 3 2 1 0-1 -2-3 -4-5 Private gross fixed investment Government spending Net exports Private consumption Private inventories (change) Real growth (qoq) 2013Q1 2014Q1 2015Q1 2016Q1 Source: Haver Analytics. 2016Q3 Inflation Indicators (YoY; in percent) 3.0 2.5 Headline w/o VAT 2.0 Core (ex. fresh food) w/o VAT 1.5 BoJ Core core w/o VAT 1.0 0.5 0.0-0.5-1.0-1.5-2.0 Sep-10 Aug-11 Jul-12 Jun-13 May-14 Apr-15 Mar-16 Nov-16 Sources: Haver Analytics; IMF staff estimates. 11
Incomes and labor market policies could be used to raise wages and reduce labor market duality 12 Nonregular Workers and Wage Growth (YoY; in percent) 3 2 1 0-1 -2 Change in full-time wages Composition effect Changes in part-time wages Share of nonregular workers (right side) 1/ (In percent of staff) 37 35 33 31 29 Labor Market 6.5 Unemployment Rate (%) 6.0 Job opening to application ratio (RHS) Labor Force Growth Rate (YoY, RHS) 1/ 5.5 5.0 4.5 4.0 3.5 3.0 2.0 1.5 1.0 0.5 0.0-0.5-1.0-3 2002Q2 2006Q2 2010Q2 2014Q2 Sources: Haver Analytics; and IMF staff estimates. 1/ Yearly Average. 27 2016Q3 2.5 Oct-00 Feb-04 Jun-07 Oct-10 Feb-14 Source: Haver Analytics. 1/ 3-month moving average. Nov-16-1.5 12
Financial conditions have improved under QQE 13 Corporate-Government Bonds Spreads (5Y) (In percent) 1.2 1 AA-rated A-rated BBB-rated Japan: Real Interest Rate (In percent) 2 1 0.8 0.6 0 0.4-1 Real Lending Rate (10 year inflation swaps) 1/ 0.2 0 1/23/2015 7/23/2015 1/23/2016 7/23/2016 1/23/2017 Source: Bloomberg L.P. -2 Real 10-year JGB Rate (10 year inflation swaps) Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 1/ Based on average long-term bank-loan rate. Sources: CEIC; and Haver Analytics. Nov-16 13
A favorable investment environment 14 Oil Prices, Equity Prices and the NEER 25000 120 Current Profits (In Trillions Yen) 16 200 20000 15000 10000 5000 0 Crude Oil Yen per Barrel Nikkei 225 JPN NEER (RHS) 2006Q1 2008Q2 2010Q3 2012Q4 2015Q1 Source: Haver Analytics; and IMF staff calculations. 100 80 60 40 20 0 2016Q4 14 12 10 8 6 4 2 0-2 -4 Manufacturing Corps Non-Manufacturing Corps Cash On Hand & In Bank (RHS) 2005Q1 2008Q1 2011Q1 2014Q1 Source: Haver Analytics. 180 160 140 120 100 80 60 2016Q3 14
with high corporate cash 15 15
Inflation expectation has been trending down 16 Inflation Expectations (Year-on-year, in percentage points) 3.5 Tankan Survey: Inflation Outlook (YoY; in percent) 1.9 3.0 1.7 2.5 2.0 1.5 Inflation-Swaps 1Y Inflation-Swaps 5Y Inflation-Swaps 10Y 1.5 1.3 1.1 1.0 0.5 0.9 0.7 1 Year ahead 3 Year ahead 5 Year ahead 0.0 0.5 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Dec-16 2014Q1 2014Q4 2015Q3 2016Q2 2016Q4 Sources: Bloomberg; and IMF staff estimates. Source: Haver Analytics. 16
Large demographic headwinds ahead 17 17
18 More fiscal consolidation in the medium-term is needed to secure fiscal sustainability Japan: Public Finances (Percent of GDP) 250 200 150 100 50 Fiscal impulse (RHS) Gross debt Output gap (RHS) Projection 6 4 2 0-2 -4-6 0 2000 2005 2010 2015 2020 Sources: CAO; and IMF staff estimates Note: Fiscal impulse is changes in the structural primary balance. -8 18
The Medium-term: What Does the New Mediocre Mean For Asia and Japan? 19
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Global and Asia s growth has moderated in recent years World: GDP Growth Outturns vs. WEO Projections 1/ (Year-over-year percent change) 9 8 7 6 5 4 3 Outturn 2010 2011 2012 2013 2014 2015 Asia: GDP Growth Outturns vs. WEO Projections 1/ (Year-over-year percent change) Outturn 2010 2011 2012 2013 2014 2015 9 8 7 6 5 4 3 2 2 Sources: IMF, WEO database; and IMF staff calculations. 1/ 5-yr forward projections from October WEO in each year. Sources: IMF, WEO database; and IMF staff calculations. 1/ 5-yr forward projections 20 from October WEO in each year. 20
Asia is diverse but there are three broad groups in relation to the new mediocre Group 1 (Japan): stagnation has been present for more than two decades, well before other advanced economies were hit. Group 2 (China, Korea, Singapore, and Thailand): looming rapid aging and demographics pressures; slowdown in productivity growth. Group 3 (India and other fast growing economies, such as Indonesia, Malaysia, Vietnam): not at risk of stagnation domestically but can be affected through spillovers. 21
Signs of the new mediocre in Asia and Japan? Long-term interest rates declining? Natural (or neutral) interest rates declining? Low inflation becoming more common? Demographics becoming a headwind? Productivity growth declining? Trade slowdown in Asia? 22
Long-term rates have fallen significantly in some cases, but not everywhere Selected Asia: Change in 10-year Government Bond Yields (Percentage points; Sep 2016 compared to 2000-07 average) Selected Asia: Change in Central Bank Policy Rates (Percentage points; Sep 2016 compared to 2000-07 average) 0.0-0.5-1.0-1.5-2.0-2.5-3.0-3.5-4.0-4.5-5.0 0.0-0.5-1.0-1.5-2.0-2.5-3.0-3.5-4.0-4.5-5.0 Sources: Bloomberg; and IMF staff calculations. 23
2000M1 2002M1 2004M1 2006M1 2008M1 2010M1 2012M1 2014M1 2016M6 2016M1 2000M1 2002M1 2004M1 2006M1 2008M1 2010M1 2012M1 2014M1 2016M6 2016M1 Low inflation becoming more common across the region Advanced Economies: Number of Countries by Headline Inflation Rates (Percent of 33 countries) Inflation rate below 2% Inflation rate below 1% Inflation rate below 0% 100 80 60 40 20 Asia: Number of Countries by Headline Inflation Rates (Percent of 22 Asian countries) 100 80 60 40 20 Inflation rate below 2% Inflation rate below 1% Inflation rate below 0% 0 0 Sources: IMF, Global Data Source; and IMF staff calculations. Sources: CEIC Data Company Ltd.; Haver Analytics; and IMF staff calculations. 24
Philippines India Indonesia Malaysia WORLD Vietnam Australia New Zealand High-income countries China Thailand Singapore Hong Kong SAR Korea Japan Philippines India Indonesia Malaysia Vietnam New Zealand Australia Thailand Singapore Korea China Japan Hong Kong, SAR Demographics: A headwind for some, a dividend for others 90 80 70 60 50 40 30 20 10 0 Asia: Old-Age Dependency Ratios (Percent) 2005 2020 2050 Asia: Growth Impact of Demographics Trends (Percentage point impact on real GDP growth; average over 2020-50) 2.0 Without migration 1.5 With migration 1.0 0.5 0.0-0.5-1.0-1.5-2.0 Source: UN Population Prospects: 2015 Revision. Based on the medium-fertility variant scenario (with migration). Source: Staff estimates based on UN Population Prospects: 2015 Revision (medium-fertility variant) and IMF (2016). Note: Migration projections follow historical trends. The growth impact estimates are based on the assumptions of unchanged labor force participation by cohort, constant capital-to-labor ratio, and TFP growth unchanged from historical average. 25
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Asia is catching up in terms of GDP, but not in productivity levels Total Factor Productivity Level Compared to the United States (At current PPPs; normalized as United States=1) 0.9 0.8 0.7 0.6 0.5 0.4 0.3 Japan China Asia excl. Japan Korea India Total Factor Productivity Growth (Percent; 5-year moving average) 3 2 1 0-1 -2 6 4 2 0 Japan Korea United States China India 0.2-2 Sources: Penn World Table 9.0; and IMF staff calculations. 26
Signs of the new mediocre in Japan and Asia? To summarize: Long-term interest rates declining? Some Natural (or neutral) interest rates declining? Some Low inflation becoming more common? Demographics becoming a headwind? Yes Some Productivity growth declining? No catch-up Trade slowdown in Asia? Yes 27
Why should we be worried about the new mediocre? Lower growth can aggravate: Social and demographics pressures High leverage Trade tensions 28
Advanced Economies Emerging Europe Latin America Middle East and North Africa Asia Sub-Saharan Africa Income inequality in Asia has already risen and social spending in Asia is relatively low Change in Income Inequality (Net Gini Index; change from 1990 to 2013; simple average across regions) Sub-Saharan Africa Latin America and the Caribbean Middle East and North Africa ASEAN-5 Composition of Social Spending (Percent of GDP; year of 2010 or latest) 30 25 20 15 10 Social Protection Health Education OECD 5 LICs Asia NIEs 0 Industrial Asia Emerging and Developing Europe India China -5 0 5 10 15 20 Sources: SWIID Version 5.0; IMF, WEO database; and IMF staff calculations. Sources: Organization for Economic Cooperation and Development; Eurostat; Asian Development Bank; IMF, World Economic Outlook; United Nations; World Health Organization; World Bank; and IMF staff calculations. 29
Corporate debt is relatively high in emerging Asia and household debt has risen rapidly in several cases Emerging Market Firms: Debt-Potentially-at-Risk (Percent; share of total debt if ICR<2) 35 30 25 20 15 10 5 0 2010 2011 2013 2014 2015E China Asia excluding China Latin America Europe, Middle East, and Africa Change in Household Debt to GDP Ratio (Percentage points; from end-2007 to end-2015) Thailand Malaysia Norway China Sweden Canada Switzerland Australia Korea Hong Kong SAR Belgium Singapore France Indonesia Italy Netherlands New Zealand Japan India Austria UK Germany Portugal Spain US -20-10 0 10 20 30 Source: April 2016 GFSR. Note: Asia excluding China= India, Indonesia, Malaysia, the Philippines, and Thailand. Sources: BIS and IMF staff estimates. 30
Asia Industrial Asia NIEs ASEAN-4 China India The global trade slowdown and anti-trade sentiment could hit Asia hard Selected Asia: Contribution of Exports to Real GDP Growth (Year-over-year; percentage points) 6 5 4 3 2 1 0 1990-99 2000-15 2016-20 (proj.) Sources: IMF, World Economic Outlook database; and IMF staff calculations. Note: ASEAN-4 includes Indonesia, Malaysia, the Philippines, and Thailand. Industrial Asia includes Australia, Japan, and New Zealand. NIEs include: Hong Kong SAR, Korea, Singapore, and Taiwan Province of China. 31
Implications for Monetary, Fiscal, and Structural Policies 32
Monetary Policy in Anticipation of the New Mediocre : Some Issues to Consider? How to anchor inflation expectations? How to prepare for unconventional monetary policies (UMPs)? QE: Implementation challenges (enough assets to buy in EMs)? Negative rates: Effective in bank-dominated financial systems? How to deal with side effects of UMPs, in case undertaken? Could UMPs undermine financial stability (asset/credit bubbles)? How effective are macro-prudential policies to deal with side effects? 33
Current Account Balance (percent of GDP; 2016) 5-Year CDS Spreads basis points; 2016M1-M3 average) Fiscal policy for demand support? Selected Asia: Need for Demand Support 25 20 15 10 Thailand Singapore Taiwan POC Korea 5 China Japan Philippines Hong 0 Kong SAR Malaysia Vietnam India Australia New Indonesia -5 Zealand -2.0-1.0 0.0 1.0 Output Gap (percent of GDP; 2016) Sources: IMF WEO database; and IMF staff calculations. Selected Asia: Fiscal Space 300 250 200 150 100 50 0 Philippines Hong Kong SAR New Zealand Indonesia Thailand China Korea Australia Vietnam Malaysia India 0 20 40 60 80 General Government Gross Debt (percent of GDP; 2016) Sources: IMF WEO database; and IMF staff calculations. Note: Japan is not shown due to scale. 34
Germany Japan United States Australia Korea France Italy New Zealand Spain Portugal Colombia Indonesia Turkey Russia South Africa China India Structural reforms to boost productivity growth? Advanced Asia: Infrastructure investment (Australia); product market reforms (Australia, Japan, and Korea); labor market reforms (Japan, and Korea). Reforms Responsiveness Indicator (2011-15 average) 0.6 0.5 0.4 0.3 Emerging Asia: Raising public investment efficiency (India); labor market reforms (India, Indonesia); product market reforms (China, India); resolving corporate debt overhang (China); 0.2 0.1 0.0 Advanced economies Emerging economies Source: OECD. Note: The reform responsiveness indicator reflects the share of policy recommendations from the OECD's "Going for Growth" reports on which the country has taken significant action. 35 35
36 Thank you 36