The IMF has issued a concluding statement at the end of discussions with Japan under Article IV of its articles of association.

The IMF report notes that the positive signs in the Japanese economy need to be built upon by working to end the deflationary mindset, increasing economic growth and promoting fiscal sustainability and stability. A credible plan for fiscal consolidation in the medium term can end the uncertainty that holds back investment and consumption.

A recovery has begun with increasing exports and consumption. Real GDP growth will be around 1% in 2015 and 1.25% in 2016. The longer term outlook is relatively improved owing to a trend of more women in the labor force and structural reforms, including improvements in corporate governance.

The report notes that participation of women in the labor market could be raised by the elimination of tax-induced disincentives to work and increasing the availability of childcare. The labor market is very tight with the unemployment rate very low. The IMF considers that the authorities are correctly calling for higher wage increases and that tax incentives should be considered for enterprises that raise their wages.

Although the government is focusing on controlling the rise in social security spending the base for social security contributions may need to be widened. Further tax reforms will be required including the continued reduction in corporate tax rates combined with broadening the tax base.

The planned increase in the rate of consumption tax in 2017 is also welcomed by the IMF. As a medium term adjustment is still required to reduce debt there will need to be further increases in the consumption tax rate in later years. The broad base of the consumption tax should be retained by avoiding the imposition of multiple rates. Any regressive effects from having a single rate of consumption tax could be counteracted through targeted cash transfers.