On 7 February 2025 the IMF published a report following discussions with Japan under Article IV of the IMF’s articles of agreement. The report notes that Japan’s economy contracted in the first half of 2024 as a result of temporary supply disruption; but increased its momentum in the second half of the year. Private consumption has strengthened, but net external demand has been slow. Growth is expected to increase in 2025, with private consumption boosted by wage growth. Private investment is projected to remain strong owing to high corporate profits and favourable financial conditions.
Economic growth is expected to be close to its potential of 0.5% in the medium term. There are downside risks to growth from a slowdown in the global economy; further geoeconomic fragmentation; increasing trade restrictions; and volatile food and energy prices. There is also a downside risk from weak consumption if real wages do not rise as projected or if there is a decline in confidence in fiscal sustainability.
Tax revenues have been increased by high corporate profits, and expenditure to support the economic recovery has been partly phased out. The fiscal deficit is projected to increase slightly in 2025 as a result of more spending for defence, family measures and industrial policies. Any expansionary measures should be offset by collecting higher revenues or making expenditure savings.
Options for increasing tax revenue include strengthening the taxation of financial income of high-income earners; reducing tax exemptions; streamlining income tax deductions; unifying and possibly increasing the consumption tax rate; and broadening the taxable valuation base under the property tax. The reform to the income deduction limit for personal income tax that is currently under consideration would need to be financed by additional tax revenues, or by expenditure savings.
Reforms to support labour mobility across firms would help to improve allocative efficiency and increase productivity. The labour market will be affected by population aging and progress with artificial intelligence (AI). The population ageing will continue and has driven progress in labour-saving automation to compensate for labour shortages. Government policy is important in mitigating the effect of aging on the labour supply and supporting the labour mobility that will be needed to benefit from the adoption of AI.
Despite the relatively high participation of seniors in the labour force, obstacles to participation include an income threshold that results in a loss of pension benefits. This may lead to seniors working fewer hours than they otherwise would. Support could be given to female labour force participation through continuing expansion of childcare resources and measures to facilitate the contribution by fathers to childcare, including measures to encourage the use of flexible working arrangements.
The implementation of carbon credits trading has been in line with international practices; but further policy changes are required to meet climate targets. Possible further measures include the removal of energy subsidies; the expansion of carbon pricing; or feebates (the use of fees and rebates to improve allocation of the costs of negative externalities). Carbon pricing should be accompanied by targeted cash transfers to protect vulnerable social groups.
