On 27 January 2022 the IMF issued a report on Japan’s economy following consultations under Article IV of the IMF’s articles of agreement.
The report notes that Japan’s economy has begun to recover from the pandemic following a supportive policy and high vaccination rates. Real GDP growth contracted around 4.5% in 2020, but the economy is estimated to have grown by 1.6% in 2021. Economic growth is projected to increase to 3.3% in 2022 as global supply constraints ease, but there are still downside risks.
In the near future policies should remain supportive, but the IMF considers that the support should be more targeted. In the medium to long term, policies must also take into account issues arising from the ageing population. Reforms to enhance growth and the digital and green transformation should be facilitated.
The stimulus package announced in November 2021 will provide support for building up the economy, but the IMF considers that the measures could have been better targeted. One example is that the government should lower the income threshold for cash transfers to households with children, in view of the demographic situation the country faces. Further measures could have been included to reallocate resources to sectors with potential for high growth and to facilitate a digital and green recovery. Reforms should aim to increase the labour supply, boost productivity, and promote investment.indir
Japan’s tax to GDP ratio is low compared to the other G7 countries, so there is room for increased revenue mobilization. This could be done by increasing the standard rate of consumption tax; improving property taxation by removing the preferential treatment of residential land; reviewing the personal income tax allowances and deductions; and increasing the tax rate on income from capital. Intergovernmental information flows to identify households efficiently could be improved by measures on digitalization.
Priority policies to increase economic growth should include the promotion of digital transformation and green investment; support for start-up businesses; and increasing economic security. The share of labour income can be increased by promoting wage increases, including by measures such as corporate tax credits. The government can also support human capital investment, promote labour mobility and facilitate the restructuring of small and medium enterprises (SMEs).
Japan has lagged behind similar countries in digital adoption by businesses, e-commerce, government services, and financial services. The Digital Agency has been established to accelerate digitalization of the public sector and there are tax incentives to encourage private sector digitalization.
The IMF report considers that the policies in support of the orderly exit of firms and the incentives for non-family business succession are positive steps. More could be done to improve the business environment and promote investment in research and development (R&D). Flows of inward foreign direct investment (FDI) could be facilitated by simplified procedures and faster processing of permits for foreign labour. The government could consider amending the corporate income tax to become a cash-flow based tax, combining this with an increase in the statutory tax rate, to increase investment while remaining revenue neutral.
Japan’s government supports reforms to the World Trade Organisation (WTO) that would ensure effective resolution of disputes; modernize the trade rules; and strengthen the monitoring and enforcement function.
