On 25 January 2023 the IMF issued a report following discussions with Japan under Article IV of the IMF’s Articles of Agreement.

Japan is recovering from the pandemic and the economic recovery is projected to continue in the near term supported by increased demand, supply chain improvements, border reopening, and policy support. Exports are projected to rise as supply side constraints are eased.

There are still downside risks from the geopolitical tensions; a potential abrupt slowdown of the global economy; developments in the pandemic; continuing supply-side constraints or other unexpected events. On the upside the economy could benefit from a more robust recovery of consumption or if the recovery of inbound tourism is stronger than expected.

The IMF report recommends that any additional spending measures should be targeted and be combined with revenue raising measures. Fiscal consolidation is necessary and requires both revenue and expenditure measures. The report notes that Japan has relatively low tax revenues and relatively high age-related spending requirements.

In addition to policies to contain health and long-term care costs, measures are required to increase government revenues. More tax revenues could be raised by unifying and raising the consumption tax standard rate; increasing corporate taxation; strengthening property taxation by removing the preferential treatment of residential land; reviewing allowances and deductions for personal income taxation; raising the capital income tax rate; and increasing the social security premiums. The safety net for low income earners could be improved by introducing an earned income tax credit (EITC) scheme, through which tax credits could be provided for low-income earners.

Policies should support the involvement of women and older people in the labour market. Reforms to encourage teleworking could be introduced and obstacles to the employment of older persons could be removed. Structural reforms could encourage higher growth of wages.

Promotion of start-ups and innovation could be improved by better availability of venture capital equity funding, and a more flexible labour market would encourage ventures and the creation of new companies. Corporate investment and innovation could be encouraged through tax incentives. Fiscal incentives could be used to increase the return on investment, particularly in information technology and research and development (R&D).

Policies to digitalise the public sector should be coordinated and implemented through the Digital Agency. The digital transformation of the private sector could be promoted through enhanced training on IT skills, measures to ensure data privacy, promotion of digital literacy, consumer protection and cybersecurity.

The report notes that further reform is required in relation to trade policies. Japan should cooperate with the international community to continue strengthening the rules-based multilateral trading system and to ensure effective WTO dispute settlement.