On 4 October 2018 the IMF released a report following the conclusion of talks with Japan under Article IV of the IMF’s articles of agreement.

The IMF notes that Japan’s economy is growing above its potential but there are more downside risks than last year. There are challenges from the demographic situation and more vigorous policies are required to boost potential growth.  Growth is estimated at 1.1% for 2018.

The government remains committed to a rise of two percentage points in the consumption tax rate in October 2019 but have not yet specified mitigating measures that will accompany the rate rise. The report considers that the government should adopt a neutral fiscal stance in 2019 and 2020 to make the planned consumption tax hike successful. The consumption tax increase in October 2019 will generate more tax revenue, but without mitigating measures there will be a contractionary effect on the economy. Japan should implement measures to support growth momentum and should go forward with accelerated structural reforms.

The IMF report considers that the existing corporate tax incentives for wage increases should be strengthened, minimum wages should be raised further, and administratively-controlled wages and social transfers should be increased. There should be gradual increases in the consumption tax rate beyond 10%, to finance growing social security costs and reduce risks around debt sustainability risks. The tax should continue to have a unitary rate structure as it moves above 10%, to enhance efficiency, reduce compliance and administrative costs, and support revenue-raising.

Emphasis should be placed on reform measures to boost productivity, the labour supply, and investment. Implementation of such measures will be critical to raising potential growth, productivity, and future incomes. Greater participation in the labour market by women, older workers, and foreign workers could partly offset difficulties posed by Japan’s demographics. Japan should eliminate disincentives to full time work resulting from the tax and social security system, combined with moves to increase availability of childcare and reduce the gender pay gap.

The IMF report considers that market and corporate reforms should be implemented to lift productivity and investment. Measures should incentivize alternative sources of financing for small and medium enterprises (SMEs), support SME investment in research and development (R&D) and support business succession of firms with high growth potential.

Continued deregulation and deeper corporate governance reform will also help increase productivity and investment. Wider adoption of automation and AI could also boost productivity. Trade liberalization and promotion of foreign direct investment (FDI) can strengthen investment and economic growth. Further reduction and removal of tariff and non-tariff barriers through multilateral trade agreements will also boost growth.